- Rising commitment percentages coincide with increasing fund sizes
- £1.1bn expected to be committed for funds currently raising capital
- Up to a third of GPs are expected to use funds from carry to fund a proportion of their personal commitment
“These figures show that the days of 1 or 2 per cent commitments are long gone, as LPs expect increasingly large commitments from GPs,” commented Jonathan Harvey, who looks after European Fund Finance at Investec. “As the size of funds has risen along with proportionate commitments, the absolute size of commitments is increasingly significant.”
As a result many are relying on carry from previous funds: in an analysis of the 73 European buyout funds currently raising capital, based on Preqin data, Investec estimates that GPs and their teams will commit £1.1 billion to funds currently in the market based on a combined target size of £36 billion – an average of £16 million per fund.
These calculations indicate that more than a third (36 per cent) of GPs are relying on carry to finance commitments to future funds, while one in five (19 per cent) will use external debt. Nearly one in ten (8 per cent) don’t know how they will secure all or part of the funding.
Joe Topley, Director at Ontario Teachers’ Pension Plan’s London office, shared some of the nuances behind an LP’s assessment of a GP’s team commitment to its fund: “If you are at 1 per cent then you had better have a very good reason why it’s not higher.” In his opinion, as a GP, you “should be at least mortgaging your house.” But he adds:
“You don’t want your GP overleveraged, however, and worrying about his or her personal cash flows rather than focusing on the day job.”
Simon Hamilton, Global Head of Fund Finance, Investec, commented:
“This is something we’ve been noticing in the market for some time: with the combination of increased commitment sizes and reliance on carry, increased global political volatility, more and more GPs are asking about funding lines in case carry doesn’t come through – effectively a form of insurance against future macro events which are beyond a GP’s control. This is understandable, with more than a third of respondents saying that they will use carry to fund future commitments.”
In a survey of 292 private equity professionals across the world, it was found that over half (55 per cent) of GPs expect their next fund to be at least 25 per cent larger than their previous or current fund, with 12 per cent saying that they expect to raise a fund twice the size or larger. Fund sizes have significantly increased in recent years on the back of increasing institutional allocations to private equity as investors struggle to maintain returns in more traditional asset classes.
To cover these commitments, many GPs and their teams are having to look beyond their own resources to raise the capital.
Simon Hamilton continued:
“The private equity fundraising market has been extremely buoyant over the past few years which naturally results in higher commitments from GPs. With average commitments at 3.3 per cent, GPs plan on committing tens of millions to their next funds – capital which many may not have readily available. The increasing diversity of funding sources reflects the pressure that GPs face when sourcing capital for personal commitments.
“There is a risk that GPs relying on reinvesting carry from previous or current funds could fall short of their funding commitments should their exits not deliver the expected returns therefore reducing the capital they expect to receive. With a large amount of capital locked up in funds in a market that is increasingly characterised by fits and starts, GPs require nimble, flexible, and creative financing from their debt providers to react quickly to market opportunities and maximise returns.”