‘Tailor made’ private equity (PE) funds have never been so popular. The main reason for this was the impact of the global financial crisis around 2008/2009. Although it would be wrong to suggest that the global PE marketplace was in danger of collapse, this period represented the unknown for the industry, as PE markets had enjoyed almost unbroken year on year growth since the 1970s.
The results of the period from 2008 – 2013 are clear, with record figures when it comes to ‘dry powder’ – unspent funds – and many smaller PE houses struggling to attract investment. At the same time, the market is such that 2013 was one of the best ever years in terms of fundraising.
Overall, there is a strong belief in the industry that the PE markets are almost at the level they were at in 2008/09, although the PE landscape is slightly different today, with funds increasingly looking at safer investments and being less inclined to take a punt.
When we talk about ‘tailor made’ investment funds, we’re looking at the terms, conditions, and the structure of investment. It doesn’t involve funds that invest in specific areas or industries; this has been the way since the advent of PE, there are some general funds but many industry specific ones, too.
‘Tailor made’ funds are designed to attract investment and favour investors themselves rather than PE funds of PE managers. This is because in specially structured funds managers are paid based on what they invest and the success of these investments, rather than the previous model where remuneration was largely based on how much capital they earned.
Consequently, investors putting their capital into such funds feel more confident that PE funds will pick the ‘right’ investments and not just find opportunities so they can say they have invested what they have raised.
One of the main drivers of such funds has been co-operative arrangements and formal partnerships between smaller PE houses and the larger market leaders. These smaller houses are struggling to raise high levels of investment, but can take smaller funding volumes and strike a deal with the larger houses, who despite raising higher sums often still need help in hitting their fundraising targets.
These arrangements, alongside other developments such as the availability of online deal making opportunities, are making a wider range of investments open to more people than ever before.
Different funds now offer a range of investment structures, and although these typically mean lower sums of money go into the pockets of PE funds and their managers, such ‘tailor made’ offerings are playing a crucial role in pushing the PE market back to the forefront of the financial industry.