Some people like private equity so much, they commit to it every single year. That, at least, is what supporters of UK mid-market private equity firm Legal & General Ventures (LGV) do.
LGV is not alone is going back to the market every year. Alchemy Partners, for example, the London-based private equity firm run by the mercurial Jon Moulton, also goes cap in hand to investors on an annual basis. But it is certainly a rare phenomenon.
Rare perhaps, but also advantageous, contends LGV CEO Adrian Johnson. He told PEO investors like the flexibility of annual funds. Rather than having to commit a set amount over a number of years, he says, his firm’s LPs can decide to increase or decrease the amount of their commitment at the end of each 12-month period.
He also points out that it is not a ‘rigid’ 12 months in terms of putting the money to work: the investment period can be automatically extended by a further three months and then possibly even longer (with the permission of investors).
He continues that, with the investment period being shorter, LGV tends to get money out quicker and then distributes cash back to LPs faster than most of its competitors.
Not all limited partners agree, though, that annual fundraising is a good thing. “What happens if the deal environment weakens markedly in a given year?” asks one. “What do you do with the money?”
The extended investment period alluded to by Johnson may help, but still may not be long enough to assuage all doubts. Says one fund of funds manager: “The advantage of a longer investment period is flexibility to make the most appropriate investments. We don’t want our GPs being under pressure to put the money out the door.”
The same source adds that committing to a four-year investment period provides more certainty of planning, and also questions whether a management team is sufficiently committed if, in a given year, the fundraising falls short of target. With a reduced management fee, does the LP have the security it needs that the GP is sufficiently incentivized?
Johnson recognises such concerns: “You’ll always get some investors saying they’re used to a conventional fund and this is out of the ordinary so we don’t like it. But we have still managed to increase our third-party funds by three times over the last five years.”
Annual fundraising is also, he notes, a good way of making sure that you stay constantly in front of your investors and helps to ensure that you always aware of their latest thoughts and requirements. Given LGV’s steadily growing capital pools, it appears that familiarity does not always breed contempt.