Fundraising gap impedes mid-market exits – AVCJ Forum

In much of developing Asia, the middle market for private equity has stayed in the $500 million to $1 billion range, while large-cap funds have seen substantial increases in recent years, reaching $6-12 billion territory. This gap is seen as putting pressure on mid-market GPs that have scaled portfolio companies into a market where there are too few buyers.

Atul Kapur, co-founder at Southeast Asia and India-focused Everstone Capital, said the situation is forcing mid-market players to increase their fund sizes as well in order to buy bigger assets that would appeal to global buyers upon exit. The challenge is exacerbated by a lack of secondary activity among similar-sized GPs in many jurisdictions.

“Now no one wants to write a check of $200-300 million equity, and therefore that is now becoming a deciding factor as to what the input is if you want to make 2.5-3x your capital. You just have to write a bigger check. Otherwise, there’s a yawning gap between the mid-market and the next leg up,” Kapur said. “I need to tailor the input to what the output looks like.”

Rob Koczkar, a managing director at Sydney-based Adamantem Capital, described a similar scenario in Australasia but identified a number of overlapping dynamics that mitigated exit pressure.

These include a fair amount of appetite for assets in the A$500-600 million ($340-410 million) range among GPs investing via funds of more than A$2 billion, as well as interest among global firms in getting modest levels of mid-market exposure to Australia. Koczkar also described growing trends around co-investment as critical to investing in a stratified market.

“Having deep relationships with our LPs forged under a number of different deal situations actually allows us to approach [co-investment at the larger end of the market] with quite a high degree of confidence,” he said. “So that’s an important part of the way we approach the market opportunities that are in front of us.”

However, uncertainty among GPs remains one of the main obstacles to co-investment as a solution for mid-market exit difficulties, especially as the strategy has become increasingly popular with LPs. Brian Lim, a partner at Pantheon, which claims to have transacted $3 billion in co-investment deals since 1997, said GPs should be careful in verifying an LP's transaction capacity.

“I’m sure many GPs around the room will take it with a pinch of salt sometimes and be a it nervous about having to rely on a co-investment syndicate to be able to fill their cap table,” Lim said. “I think there are a lot of people who raise their hands and say,  ‘We want to do co-investments,’ but there are few that are actually able to execute at the timelines of a GP.”

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• Topics
• GPs
• LPs
• Fundraising
• Exits
• Asia
• Everstone Capital
• Adamantem Capital
• Pantheon
• AVCJ Events