15 Apr 2024
Why GPs are looking more widely to cover their commitments?
Every year, we ask General Partners (GP) how they finance their commitments. Their responses generally follow a similar pattern. However, in our Private Equity Trends 2024 survey we sensed a change in mood.
GP commitments are required in private equity fundraising to demonstrate ‘skin in the game’ along with limited partners (LPs). A degree of personal commitment promotes better alignment in decision-making between GPs and LPs.
The industry standard for GP commitments is generally 2% of the fundraise, which can be a significant sum on larger funds. Our survey put the level at 3% and it’s not uncommon for commitments to be nearer 10% in some cases.
GPs weighing up increases in future commitments
The challenge GPs face now is how to finance their total commitment. GPs are not receiving cash back from their investments as quickly as before. Deals are taking longer to complete and valuations are decreasing, while economic uncertainty is causing GPs to delay exit decisions.
Greater realism is setting in as we enter a new normal of decreasing valuations. They are accepting lower valuations to keep the fundraising machine running smoothly again and make sure they can repay LPs. This can leave GPs exposed when it comes to ensuring they can meet all their future commitments.
However, although GPs need liquidity to repay LPs, accepting lower valuations doesn’t impact the amount of money they earn. Our survey found that 92% of GPs still expect their current fund to make carried interest. Just not as much as had originally been forecast. Indeed, 27% said they reinvest carry proceeds from previous funds to meet their commitments.
But, set against this new realism in the private equity industry, latent potential risk could be building up for GPs regarding how to meet their commitments.
Continuation vehicles drive GP considerations
We are seeing more GPs opt for continuation vehicles for funds. Here, they put assets into a new vehicle to allow further capital to be invested to help grow successful assets. So, GPs have less money available through a lack of exits but face higher commitment levels because they are now adding continuation vehicles to the mix.
Choosing external funding
Using external debt is a less favoured method for funding GP commitments when interest rates are high. Also, GPs didn’t need to look beyond their own business when fundraising ran smoothly and exits were plentiful.
Our survey found that only 8% of GPs currently choose to finance using external debt funding, which is a relatively low figure that we expect will increase. Peaking interest rates would certainly make external debt financing more attractive. GPs are likely to borrow more if they are confident that interest rates are coming down.
Selling a stake
Another choice GPs are exploring to finance their next commitment involves monetising their own management company by selling a stake in it. This generates cash to meet GP commitments.
The downside, inevitably, is that GPs give away part of the ownership in their business. This has the potential to upset junior partners, if they feel they are losing some control in the business. Partners might not welcome the idea that their career paths could be influenced by an outside owner.
New timescales
Along with greater realism about low valuations and slower fundraising, we are also seeing changes in typical fundraising cycles. This reflects caution on the part of GPs regarding their commitments.
With the high exit multiples that we saw up to 2021 now a thing of the past, the typical GP fundraise of every three years has in many cases moved out to every four years.
Private Equity Trends 2024: Navigating a changing landscape
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Jonathan Harvey
Fund Solutions
Jonathan is one of the original members of the Fund Solution team and has been involved directly in its strategic development since inception. During this time, Jonathan has been responsible for setting up the European Fund Solution business and developing the Capital Call product. Jonathan currently heads up the relationship management function within the Fund Solution’s team, with responsibility for providing the full Fund Solutions product set to the existing client base.
Jonathan has been with Investec since 2007 and has experience working in the Structured Property Finance, Specialised Lending and the Fund Solutions business.
Helen Lucas
Co Head of UK Direct Lending Origination
With over 16 years’ experience within the leveraged finance, restructuring and credit markets, Helen is responsible for sponsor coverage, origination and structuring of bespoke financing solutions for UK lower mid-market corporates and PE, with a particular focus on supporting sponsors with primary buy outs and buy and build opportunities. She also leads the sustainability initiative within our Private Equity group.
Helen now Co Heads the UK Direct lending origination business having joined Investec in 2014 from the Debt Finance team in Barclays where she worked as a Vice President of Origination. She joined Barclays in 2007 and undertook a variety of restructuring and lending roles across all size businesses, having graduated from Loughborough University with a Bachelor of Chemical Engineering degree and completed a Graduate Programme with Total UK.
Kate Gribbon
Head of Financial Sponsor Coverage & Origination
Kate is Head of Financial Sponsor Coverage & Origination team in London, advising ambitious fast-growing companies seeking growth capital, with a focus on the technology and consumer sectors. She typically works with established businesses who have reached £10m+ revenue, seeking £10m+ in funding, offering them access and connections to the right private capital (debt and equity). She offers a focused process, targeting specific and appropriate potential investors ranging from family offices, to VCs, private equity through to larger institutional funds. Kate enjoys building long-standing client relationships and positioning entrepreneurial businesses to achieve maximum value at their eventual exit point. Kate has had previous roles at Deloitte and finnCap Cavendish with a particular focus on sell-side M&A deals in the consumer sector. She has also spent many years on deal origination, building earlier stage long-term relationships with owners of private companies, intermediaries and investors.
Jonathan Harvey
Fund Solutions
Jonathan is one of the original members of the Fund Solution team and has been involved directly in its strategic development since inception. During this time, Jonathan has been responsible for setting up the European Fund Solution business and developing the Capital Call product. Jonathan currently heads up the relationship management function within the Fund Solution’s team, with responsibility for providing the full Fund Solutions product set to the existing client base.
Jonathan has been with Investec since 2007 and has experience working in the Structured Property Finance, Specialised Lending and the Fund Solutions business.
Helen Lucas
Co Head of UK Direct Lending Origination
With over 16 years’ experience within the leveraged finance, restructuring and credit markets, Helen is responsible for sponsor coverage, origination and structuring of bespoke financing solutions for UK lower mid-market corporates and PE, with a particular focus on supporting sponsors with primary buy outs and buy and build opportunities. She also leads the sustainability initiative within our Private Equity group.
Helen now Co Heads the UK Direct lending origination business having joined Investec in 2014 from the Debt Finance team in Barclays where she worked as a Vice President of Origination. She joined Barclays in 2007 and undertook a variety of restructuring and lending roles across all size businesses, having graduated from Loughborough University with a Bachelor of Chemical Engineering degree and completed a Graduate Programme with Total UK.
Kate Gribbon
Head of Financial Sponsor Coverage & Origination
Kate is Head of Financial Sponsor Coverage & Origination team in London, advising ambitious fast-growing companies seeking growth capital, with a focus on the technology and consumer sectors. She typically works with established businesses who have reached £10m+ revenue, seeking £10m+ in funding, offering them access and connections to the right private capital (debt and equity). She offers a focused process, targeting specific and appropriate potential investors ranging from family offices, to VCs, private equity through to larger institutional funds. Kate enjoys building long-standing client relationships and positioning entrepreneurial businesses to achieve maximum value at their eventual exit point. Kate has had previous roles at Deloitte and finnCap Cavendish with a particular focus on sell-side M&A deals in the consumer sector. She has also spent many years on deal origination, building earlier stage long-term relationships with owners of private companies, intermediaries and investors.