We recently caught up with Eric Zoller, Founder and Partner at Sixpoint Partners, to discuss today's PE fundraising trends, whether or not limited partners should adjust expectations for returns in a high-multiple environment, working with LP consultants, and more.
Sixpoint Partners is a global investment bank whose core areas of focus include primary fund placement for the middle-market private equity industry.
What are some different strategies that GPs can use to gain commitments in today’s fundraising environment?
"Outside of presenting a strong track record and a clear strategy to LPs, there are a few different ways that a GP can sweeten the deal in order to enhance its fundraising efforts. First, are fee breaks based on timing. An LP could be afforded a fee break if it invests before the first close, regardless of the size of their commitment. Generally, you want to raise at least 40% of your target by first close, which will help convince other LPs to commit in subsequent rounds. Second, are fee breaks based on size. It is easier for LPs to work with fewer GPs and vice versa, so GPs should seek to provide incentives to investors as a way of increasing their commitment size and shortening the time spent on the fundraising trail. Third, is the opportunity to co-invest, allowing investors to bypass the traditional fund structure and strengthening your relationship with LPs in the process."
Given today’s high-multiple environment, should LPs be targeting a lower return profile than in years past?
"While EBITDA multiples are indeed high, LPs don’t necessarily need to change their targets. The best-performing funds are still targeting the same returns they always have, high teens to 20%+ IRRs and 2x+ money multiples, and are continuing to deliver. Although, if multiples stay this high for a sustained period, we may see more pressure on IRRs, as it will take longer to generate those returns; money multiples should not be affected as much."
What trends are you seeing around closing times and the ability to hit targets for GPs on the fundraising trail?
"Your experience on the fundraising trail depends heavily on what type of fund you are, i.e. what type of returns you’ve produced in prior funds and what kind of relationship you’ve maintained with your LPs. Those that are unable to secure a sufficient number of re-ups or have had massive underperformance will have to spend more time fundraising and will often close below their targets. On the opposite side, you have many groups that are able to go through the market quite quickly because they tend to be more mature, have secured more re-ups and have a reasonable target relative to their last fund’s size. These groups will generally close in three to six months. Lastly, there are groups that have had good performance but are underdeveloped in some way. For example, maybe they haven’t had a sufficient number of exits, so LPs will want to see a little more of that development occur before making a commitment. This last class of fund will likely hit their target and cap, but it will likely take more time to manage that process. In this situation, it is essential to carefully manage the flow of information through a GP's advisor who can help best position the story and address investor questions."
What role do LP consultants play in the fundraising process?
"Consultants sometimes have a mixed reputation, but they’re in fact a very important and constructive part of the private equity market. Because of their consultative process, many GPs view them simply as taking too long to make decisions and adding an additional, sometimes cumbersome, layer of review to the fundraising process. We, however, encourage our clients to take a positive view of the LP consultant. When GPs reach out early to become known and vetted, LP consultants can be incredibly accretive to the fundraising process. Then, later in the process, it becomes easier to form a strong relationship with the underlying LP."