The private equity industry has expanded rapidly over the last decade, with its continued momentum and success exemplified by the number of recent firm launches. In the five years to the end of 2020, nearly 400 first-time PE funds raised over $80bn in capital and, with a strong start to fundraising in 2021, this trend appears likely to continue*.
While a robust fundraising environment is broadly beneficial for these newcomers, it is worth considering the growing pains often associated with scaling a private equity firm.
With overall fund sizes climbing by an average of 25% per annum since 2014*, private equity partners are often faced with increasingly significant capital requirements to meet the GP commitments associated with larger funds.
- This dynamic can be even more challenging for earlier stage GPs. Access to sufficient growth capital thus becomes a critical component of a firm’s development.
- A similar challenge is faced by maturing GPs seeking to expand the breadth of capabilities they offer their investors. For many firms, the successful launch of a new strategy will require seed capital, whether for hiring a dedicated team or to complete investments before raising a debut fund.
Traditional forms of addressing these financing challenges have either come with burdensome restrictions, as is the case with bank financing, or involve permanent dilution of the partners’ equity in the management company in the event of a GP stake sale.
As the private equity industry has matured, the range of financing options available to GPs has grown in tandem, including the emergence of institutional non-dilutive capital providers. These providers, such as 17Capital, can invest alongside the GP and serve as a long-term partner in helping firms realise their growth ambitions. We provide capital to management companies in the form of self-liquidating preferred equity or debt – both highly flexible products that can be adapted to a GP’s needs.
Non-dilutive financing also maintains better alignment across GP teams. While selling an equity stake can disincentivise the next generation of leadership through permanent dilution, a non-dilutive option preserves the economics available to the junior partners as they assume larger roles and provides a mechanism for buying into the management company. As such, long-term employee retention can be strengthened through partnering with a solutions-oriented financing provider.
As a pioneer in this space, 17Capital has witnessed the dramatic rise in demand for growth-oriented management company financing and recently completed a deal of exactly this nature, creating a bespoke funding structure for a GP that had just raised its third commingled fund. The GP’s founders were looking for a partner who could help finance a larger GP commitment in the latest fund, seed new strategies, and create a durable balance sheet to help execute investments directly. We are now working with the same GP to upsize our commitment as the team executes its growth plan and broadens ownership of the firm to include the next generation.
Flexible growth capital to:
- Augment fund commitments
- Seed new strategies
- Expand ownership
Preserving team quality and alignment
17Capital itself experienced the challenges of rapid growth in the years following the firm’s inception in 2008. We know the importance of maintaining the quality and depth of the team, along with preserving alignment across all seniority levels. Through drawing on our own experience, we can bring our insights to support the development of our GP partners.
For ambitious, high-growth managers, selecting the appropriate source of capital can have a significant impact on the firm’s trajectory and long-term economic profile. Flexible, non-dilutive capital, delivered with speed and certainty of execution by a specialist provider can be just the ticket.
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We would love to discuss how 17Capital can support your firms growth through flexible, non-dilutive capital solutions and exposure to the 17Capital community.
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