By every measure, 2009 was the worst year to raise a private equity fund.
PE fund-raising suffered from significant drop in 2009 in emerging markets in general and particularly in MENA. Only four funds were successfully closed in 2009, compared to 13 funds in 2008, according to Zawya Private Equity Monitor.
In this turbulent financial market and stagnant PE industry, we believe there are key guidelines that a PE fund should follow in order to overcome the tough fundraising environment. Respecting these guidelines has allowed EuroMena II, for example, to successfully raise USD 100m. These guidelines represent the ingredients for successful fund-raising, in our opinion:
Outstanding relationship with historical LPs
It is vital for a fund to manage the expectations of its LPs and try to go beyond the already-set objectives. Maintaining excellent relationships with LPs and winning them over have proven to be of utmost importance, especially in unfavorable market conditions. This relationship comprises good quality and regular reporting, regular visits and communication, a continuous and full respect of the funds' guidelines as well as offering them co-investment opportunities. The derived result of this is securing recurrent investment by these LPs.
Good track record in a turbulent market, both in terms of the performance of the existing portfolio companies and exiting from companies
In times of crisis, the ability of the fund management team to monitor the
performances of its portfolio companies and assist their top management to adapt to exceptional market conditions is of major importance. This will result in portfolio companies developing greater resistance to the market downturn in turbulent times and improvement in portfolio valuation.|
Ensuring seed financing from trusted institutional investors
Ensuring solid seed financing early on in the fundraising process can give a great boost. In difficult times, having international institutions with abundant capital (but strict conditions) aimed at emerging markets early on in the process is crucial. This requires a very strong relations and trust between the two parties built over time. In 2009, almost all of the funds raised in MENA had one or more international institutions.
These institutions provide great added-value in terms of the development of the portfolio companies (such as SME businesses in the region) as well as additional credibility vis-à-vis other LPs. Procuring funds from these institutions is not easy; they require strict adherence to their internal regulations, strong governance schemes and high accountability.
Good relations with shareholders and managers of existing portfolio companies they are the best marketing agents for the fund
Good relationships with shareholders and managers of portfolio companies is essential. They provide good referral base about the fund management team and they could well be potential investors in the fund in addition to being the best marketing agents for the fund management team.
A strong relationship between the GP and the Fund Management Team
A strong relation between the GP and the Fund Management team, along with a complete alignment of interests is essential and gives great comfort for
LPs. Clearly, fundraising in difficult times is very tough, thus increased co-ordination between the two parties is crucial.
A strong and serious pipeline of potential deals
Transactions are usually on hold during crisis. It is as difficult to exit in good conditions as it is to invest in good conditions. Thus, having a serious pipeline of potential deals is key to attracting interest and funding from LPs, whose focus on this issue is much more than in normal times.
A strong and dynamic Fund Management Team
Finally, money is worthless with no human capital supporting it. Funds should be handled by a strong, dynamic, motivated team that has shown its ability to deal with changing environments and cope with different situation, as well as entertaining good relationships with the LPs, the fund advisors, and portfolio company managers, etc...
We believe the prospects for 2010 are positive for private equity in MENA as the markets are showing signs of recovery and higher potential for investing in good opportunities at reasonable valuations.
Fund-raising though, could still be shy in 2010 as there is significant dry powder for investment before the managers return for additional fundraising.