Kevin K. Albert - Private Market Fundraising

By Jay Fewel, Oregon State Treasury Investment Division

The private equity asset class has come a long way in the past three decades. It has grown from a cottage industry to a large, mainstream investment strategy employed by most sophisticated investors the world over. From the standpoint of 2013, todays private equity industry both qualitatively and quantitatively is essentially unrecognisable from that which existed in the early 1980s, when Oregons public employee pension plan made its first investments in the space.

To illustrate, in 1981 a little firm by the name of Kohlberg Kravis Roberts approached the Oregon public employee pension seeking about $170 million to complete a buyout of the states home-grown grocery chain Fred Meyer, Inc. At the time, KKR had only done a relative handful of deals going back to the 1970s, and so its track record was limited and inconclusive. Further, in 1981, the leveraged buyout transaction model was not yet a proven strategy. But the pension plan was able to get comfortable with the capabilities of the team and the soundness of the transaction, and it did not hurt that the promised returns were quite attractive. So the investment was made and Oregon played its part in pioneering the early formation of the private equity asset class, a bet which has paid off well for the pension plan over the intervening decades. KKR has done pretty well too and its latest flagship fund garnered a $750 million commitment from Oregon.

For some perspective on the magnitude of this change, just look at the numbers. Back then, fewer than 500 firms raised about $100 billion in commitments over the entire decade, across all strategies. By 2012, roughly 4,300 firms have raised close to $4 trillion in commitments over the previous ten years. And it is not just the quantities that tell the story. In the industrys infancy, differentiated strategies were generally unheard of private equity was itself a niche strategy within the larger asset allocations of institutional investors. A fund size of $100 million raised eyebrows. Buyout funds dominated the asset class with venture capital taking second place, financial engineering was the value-add of the day, and most of the action was taking place in the US. Most institutional investment staffs were largely unfamiliar with the asset class, and there were few, if any, advisors that were competent to lend a hand in this area. Even the forms and standards relating to the limited partnership investment vehicle, which were borrowed from the tax shelter industry, were still in a state of development.

Today, investors can choose from a wide spectrum of specialised strategies, including distressed and turnaround managers, sector-focused buyout firms of all sizes, regional or country-specific funds, real estate, credit-oriented strategies, infrastructure investments, co-investment programmes and secondaries. Some fund managers still play the old leverage game, but it doesnt have the same bang for the buck that it did in the past. The focus now is on bringing real operating expertise to companies to improve bottom lines, help with strategic initiatives, fill out the senior management team, and make and integrate smart acquisitions. Further, the world is the private equity investors oyster while the US still has important advantages, investors can now use private equity to gain access to growth in regions like China, corporate divestitures in the EU, or small and mid-market companies in Latin America or Southeast Asia. The overwhelming majority of institutional investors of any size have formal private equity allocations and there now exists a host of advisory firms to provide expertise in navigating the large number of private equity investment opportunities today.

Through all of these changes, one thing has stayed the same: fundraising remains the lifeblood of the private equity industry. It is true for all investment management industries, yet it also remains a task that most investment managers would prefer to not have to undertake at all. But a dismissive attitude towards the modern requirements of fundraising bodes ill for most private equity managers. There have been times most recently in 2005-2006 and before that in the run-up to the internet bubble when a feeding frenzy mentality prevailed among limited partners seeking allocations to top-performing funds. During these periods, top-tier (and even second-tier) managers were more or less able to garner all the capital they required without much real effort. However, the relationship between institutional investors and private equity managers is in equilibrium for most periods, which means that effective fundraising can make a real difference between obtaining the commitments you seek and going home disappointed.