How many other PE funds will have losses?

Whilst this article is about fund raising strategies we wonder how many more PE firms will have blown up funds?  Aivars Lode

The carrot and the stick (or just the carrot):
The news that TPG Capital is offering incentives to limited partners to commit to its seventh flagship buyout fund didn’t come as a surprise to many LPs.

The firm is trying to recover from two struggling funds, which took some devastating hits from the loss of Washington Mutual and the former TXU, now in bankruptcy court under the name Energy Future Holdings.

TPG Capital is a prime example of a firm with a shaky recent track record doing all it can to attract investors into its latest fund. However, the idea of using incentives to draw in bigger checks at a quicker pace has become an almost routine part of marketing these days, according to numerous LP and advisory sources interviewed by sister publication peHUB.

What was once a headline-grabbing novelty among mega-funds struggling through a tough fundraising environment post-financial crisis has become part of the package general partners bring to the negotiating table.

And while in 2010 and 2011 GPs needed that extra push to get over the finish line to their target, today GPs need that extra bit of zip to help differentiate themselves in what has become the most crowded private equity fundraising environment of all time.

According to the PE/VC Partnership Agreements Study 2014-2015, published by Thomson Reuters, about 14 percent of North American buyout funds offer special incentives to come into a first close, while the figure is 35 percent for funds of funds and secondary funds. Nearly one in five (18 percent) North American buyout funds offer fee breaks for bigger commitments, as do 42 percent of funds of funds and secondary funds.

“The market has gotten much more creative about incentives and creating urgency around (fund) closes,” said Neha Champaneria Markle, portfolio manager with the private equity fund group at Morgan Stanley Alternative Investment Partners. “There are a number of things that can catalyze action, whether it’s offering co-investment, offering preferential treatment in a secondary, (or) offering certain terms that might be meaningful to a specific investor.”

TPG’s special offer

TPG Capital is aiming to raise between $8 billion and $10 billion for its TPG Partners VII, a big step down from its $19 billion sixth pool that was generating a 1.39x total value multiple and an 11.9 percent internal rate of return as of June 30, 2014 for backer Oregon Public Employees Retirement Fund.

To incentivize LPs to cut big checks and come in early, TPG Capital is offering management fee discounts based on size and speed of commitments. All investors in the first close get a 10 percent discount, plus an additional 5 percent off for commitments of $100 million or more; an additional 10 percent for more commitments of more than $250 million, and an additional 15 percent for commitments of more than $400 million, Buyouts reported in September.

This is reminiscent of some of the big European shops who, shortly after the world began emerging from the financial crisis in 2010 and 2011, started offering early close discounts. Cinven, Permira and BC Partners all tried to incentivize LPs to get their commitments in early.

First-close discounts “highlight one of the biggest challenges sponsors have in fundraising—getting some impetus to getting to that first close. That is often the hardest part of fundraising,” according to Jordan Murray, a partner at law firm Debevoise & Plimpton.

“As a private equity sponsor, you’re trying to get investors off the sidelines, to give up liquidity and that free look they have on the portfolio. The longer they wait out there, the more options they have for their money,” Murray said.

Incentives do get the attention of LPs. One private equity investment officer at a U.S. public pension said if his team is looking at two GPs they want to commit to, the one that is offering incentives will get first look.

“If we don’t have the right amount of incentives, we’ll hang around the hoop and when time permits, (start working on the fund); if there is an incentive, we might reallocate resources if we’re properly incentivized,” the LP said.

- PE HUB