Demystifying Challenges Facing Fund Raising For Private Equity In The GCC


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Challenges Facing Fund Raising For Private Equity ( fund or single-transaction) In The GCC (Arabian Gulf), and how to deal with those challenges.

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Demystifying Challenges Facing Fund Raising For Private Equity In The GCC

  1. 1. 1 Demystifying Challenges Facing Fund Raising For Private Equity In The GCC Dhafer Salih Alqahtani Founder & Managing Partner Aflaj Partners Dubai, UAE. Lately, I was involved directly in a fund raising mandate in the GCC region as a General Partner (GP), the opportunity was a straightforward proposition with its obvious merits for prospect investors; i.e. limited partners (LP). However, some of those prospect investors (LPs) indecisions and disinclination to make the decision to invest could become tiresome and irritating for any GP, albeit they show strong signs of interest but they fall short of saying ”YES”. Dealing with such frustrating moments and atmosphere is the subject of this article, where some prospect investors are inclined to drag their feet over their investment decision process starting with the face-to-face presentations, pro viding more information, follow-up meetings, phone discussions and exchanging emails. After all this tug of war only to eventually, postpone the decision to invest or just says “No”, or avoid replying altogether. Considering that, investment commitments in private equity tend to be in the high side i.e. in the millions of dollars as compared to traditional investments. Thus it’s understandable why some LPs decline to invest or take the time to make a decision, particularly when its long term and LPs do not have a well-developed or institutional investment process for their allocations, as it’s the case with some of the high-net-worth-individuals (HNWIs) and single family offices ( some single family offices have a well-structured investment decision process, including an investment committee). Also, those LPs allocations for long term tend to be small in size, besides you are not the only GP or investment firm who is after their commitments, thus they are occupied with weighing their options and most likely they are not under the pressure to put their capital to work. As a GP you should be aware of the timeline of the investment decision process, it varies among LPs depends on their level of sophistication and speed of making their decision in term of having structured investment process, methodical screening techniques, rapid turnaround practice, systematic due diligence and experienced investment team. Pension funds, SWF, multi-family offices and established investment firms will have such sophistication in-house, while the lower end of investors spectrum will be less complex and much simpler which unfortunately works against the GP closing ambitions and agendas The mindset of risk averse and over cautious nature dominate the scene when it’s comes to the lower end spectrum of LPs such as some HNWIs and Single Family Offices, as they focus in capital preservation instead of just maximizing returns, and if they take a risk they want to be adequately compensated for it. Such behavior by investor that is typical for HNWIs, single-family offices will naturally lengthen the decision making process, thus exasperating the GP who is anxious for a favorable decision.
  2. 2. 2 It is imperative that such hampering behavior at least from the GP perspective to be kept in check and dealt with carefully, while addressing the risk issues tactfully with full transparency and a lot of patient on your part as a GP. Take the time to address all the risk issues in details where the LP should drive a great comfort from your understanding of his risk worries and their mitigation. The understanding of the LP background and his accumulated wealth history will shed some light on his risk appetite and level, keeping in mind that when single-family offices and HNWIs consider alternative investments opportunities, they are venturing out of their comfort zone, which explain the cautious and undecided approach by the LPs as opposed to more institutional investors. Under such conditions, the GP should consider certain tactics and strategies to tackle those changing and challenging variables with the hope of improving the probabilities for closing on a commitment, through understanding and accommodating his prospect and existing LPs. The setbacks created by mediocre investment decision process, stretched timeline and change in investment strategy should be dealt with tactfully and skillfully. Some of those tactics are emphasize in the following findings and pointers.  At the outset, the GP is the best judge of his relationship with his LPs, where GP’s investors relation and placement teams plays a pivotal role in assessing LPs risk appetite, time horizon and expected return. A matrix of those factors versus the opportunity (fund or single transaction) in hand should be drawn to prioritize which LP requires more of the GP’s time and attention early in the fund raising program.  Considering that some LPs are slower than others in term of the investment decision process timeline, GP should categorize his LPs according to their investment decision making timeline, where more time should be allocated to the lowest spectrum of LPs and vice versa. Doing so will give the LPs with slow decision process plenty of time, without being under pressure to meet GP shorter timeline or the GP being assertive and desperately aggressive. As to the calling program plan, always start with LPs with slower process to avoid being amid those frustrating situations, it will be prudent to get such LPs into early discussions, when you are in the planning stages of the opportunity. In a nutshell, your LP should not decline to invest because he is not going to meet your deadline.  Some single-family offices and HNWIs do have a gatekeepers or advisors (mostly external); As a GP you should know the investment decision process of those gatekeepers and investment advisors. Make the effort to get acquainted with them and their procedures, also what format they are comfortable with in term of investor presentation  and investment material (are they numbers crunchers or data hungry or both), what are their internal timeframe. They should also know you and your credentials; investment strategy and policy, as well as your value creation capabilities as a GP; such insight into the gatekeeper/advisor environment will get you accustomed with the LP’s investment decision process and enable GP to synchronize his time and activities around the LP internal timeframe.
  3. 3. 3  What if the gatekeeper or advisor does not exist? GP still have to know more about the target LPs, beyond their contact information and size of their wealth. GP should know the LPs internal investment process, selection and evaluation strategy, screening parameters and constrains, do they have investment committee and how does it work, the more you know about your prospect or existing LP, the closer you are to closing a commitment.  GP knowledge of the LP investment process should cover the specifics of such process in term of timing and stages. Accordingly, aligning his interest and timeline with target LP interest and timeline with the hope that Target LP will invest in the existing opportunity, worst scenario the LP will not invest, however the GP will be well informed and prepared for the next round.  GP have to bear in mind, that gaining such inside detailed knowledge about the LP investment decision process, is not for the purpose of changing it or modifying it. This knowledge is strictly for the purpose of understanding the way the internal process work for any given LP, as well as to know where the bottlenecks or what cause the delay in the decision. Hence, the GP can be better prepare to deal with it to his advantage in the next time around, it will also reveal more about the LP and his investment team character, behavior and motivation.  Back to basic; always have all the required information and related documents for the opportunity (Fund or Single Transaction) in hand ready to share it with the LP. You should rehearse beforehand all the questions that might arise and their answers. All supporting spreadsheets and graphs as well as references and documents should be immediately available when requested by the LP.  The sophisticated LP will go deeper and beyond the present opportunity Private Placement Memorandum (PPM) into your operation in term of detailed due diligence, thus GP should prepare in advance to provide information about his firm business, operations and economics. Best practice calls for such information to be updated by the GP on a regular basis and immediately available when requested by the LP. Putting together all these information in a structured format takes a lot of time, which GP cannot afford to waste during his calling program, thus it should be ready and final before you start your fund raising campaign regardless if the LP ask for it or not.  A challenging tactical issue that GP will occasionally encounter which is a unique to our region, that is; the LP is very much interested in knowing who is investing with the GP and not as much as what are they are investing in. This type of LP base his investment decision on the quality of names who made a commitment, as the LP trust them and know about their other successful investments. This type of LP is “The Follower LP“ who does not have a well-developed investment decision process, but have faith in other LPs investment process. This type of LPs should be called on toward the end of the closing, as they tend to make a commitment fast after they screen your investors, but not as big as GP would wish for, usually the minimum.  Another challenging issue, but this one is cultural, that there are some LPs who cannot say ”NO” when they already declined internally to invest, instead they will go into complete
  4. 4. 4 silence, they will even avoid answering your follow up calls, and will not reply to your communications, that’s their way of saying “NO”. They simply do not like confrontation. Therefore, what the GP can do in such frustrating situation, you just move on, as nothing you can do with “Anti-Confrontation LP”. Nevertheless, make sure you keep this prospect investor in the loop and add him to your mailing list; send the updates of the opportunity they declined and your ongoing performance results. They will come around; it is a matter of time.  One more intriguing finding which is that many LPs in the GCC region, particularly the sophisticated ones are less attracted to the traditional PE structure; i.e. GP/LP closed end structure. Instead, they are keen to get into single transactions with the GP, such emerging trend should not be ignored as it is on the raise and require the rethinking of the GP business model and strategy. Those LPs are looking to place fresh capital through co- investments, syndicated deals, and direct investments with other LPs. They are not interested in getting into a locked PE fund structure where they have no control over the type of transactions under a blind pool. This drastic change in investment strategy by LPs was prolonged by the lingering effect of the recent financial crises spurred by LP increased wariness and regulatory rigidness, where many LPs suffered financially from traditional PE funds with blind pool of capital, with many layers of fees or hidden ones, not to mention below average returns. Such new and growing trend in the region is already in advance stages in the developed world, as LPs all over are pushing for more creativity in the alignment of interest with their GPs. So what to take from all of the above; Simply the fact that seeking fresh commitments from LPs at large is becoming a harder mandate, while with certain LPs it’s a lengthy process and irritating in the same time. It requires a lot of patient and persevering, as well as an early planning and compromising on the part of the GP, taking into consideration that some LPs timeline are elastic and they are not in hurry to make a decision while the GP is under pressure for closing. Thus, know well your LPs and accommodate their shifting sentiments by being innovative, so you can conduct a productive and effective fund raising campaign. Those few findings, tactics and strategies of best practice are neither exhaustive nor prescriptive, as each GP has his own tactics and strategies. Never the less, such findings with others known by GPs should be incorporated in an internal continuous process that is Stimulating, with the objective of strengthening and developing your relationship with your LPs based on consistent value transfer through understanding to the LP. Furthermore, LPs are becoming more sophisticated and demanding, as well as being less complacent through the assertiveness of reducing the gap between them and the GPs, in other words, a better alignment of interest, governance and transparency. Consequently, the GP have to work diligently to find the optimal balance between his business model needs and LPs demands while holding to high standard of fiduciary responsibilities and meeting his deadlines. - END -