Raising Capital When Everyone Is Scared: A Conversation with Garry Jensen
October 27, 2020
As we continue to explore the capital raising environment for funds in a virtual context against a backdrop of economic uncertainty, we turn to Garry Jensen, Managing Partner of Jensen Capital Partners, to get his insights. With an international track record of success in investment banking and capital markets, Garry is uniquely positioned to comment on the current environment for managers seeking to connect with allocators.
In fact, a global network today of 5,000 plus institution investors, approximately 2,500 fund investors and circa 1,500 direct investors. And also as regards to the analytical capabilities I developed, which allows me today to be extremely selective around the capital raising projects we take on. Reality, Brigette, is that many investors of mine rely on me to present them with opportunities that offer, call it cool, interesting, attractive, risk return characteristics, and have the basis to make them a ton of money, which is more important than ever as you can imagine in the current yield stock in moment. We're a team of four people all with extensive and diverse industry experience. As an example, PaEAo De Eusebio, my partner who works with me at Jensen Capital Partners, spent 15 years in investment banking including many years in M and A at Morgan Stanley in London. And later ran the investment banking business for Credit Agricole in Spain.
EA: Very interesting. The theme of this series is Raising Capital When Everyone Is Scared, you have more experience than I do with this, but I've observed that in tumultuous times, even professional investors flee to safety, abandoned risk assets and are hesitant to deploy capital. Is this consistent with what you're seeing as you speak to your LP investor base?
GJ: Interesting question, Bridgette. Let me say this, prior to the global health crisis, it was one of the best fundraising environments, since the last financial crisis in 2008, with, for example, more than $500 billion of equity raised each year since 2013, making it a banner period with capital pouring into literally every piece of asset class. As I mentioned before, in the current yield staffed environment, every investor is desperately chasing yield and will consider any attractive investment ideas as long as they are credible.
My point being that there was, and still is, a ton of cash available for interesting investment opportunities. Now the global health crisis, of course, initially put everything on hold, but we're slowly getting back to normality. In fact, while we ourselves remain on the sidelines for a very short period of time, we ultimately just started to take on a new capital raising project, right in the midst of it all, a first time VC technology fund with a very differentiated strategy of applying, call it a PE MNA style, inorganic growth initiatives early in the life cycle of European series B plus companies. The principles of this client of mine, what arguably a bit reluctant to enter the market back in April.
But I made a strong argument that this is indeed the right time in that there will be little competition on the capital raisings fund. And why granted a number of investors may well stay on the sidelines to see whether this all pans out or where the dust settles before entering the market again. Others will take this as a great investment opportunity. And in fact it was the right decision as we're busy, like never before. And we're getting serious traction with investors across the board and equally important, once we're back to complete normality, another six to 12 months further down the road, once the authorities have developed a COVID vaccine, I think it will potentially open a flood gate for the demand of public and both public and private capital. So I prefer to be out there right now.
EA: Well, that's encouraging. Are there certain asset classes or strategies that you find are more in favor now versus a year ago and does that differ according to LP, type, size and or geography?
GJ: And again, broadly speaking Brigette, based on what we are currently seeing in the market, investors tend to be somewhat asset class and investment strategy agnostic, i.e., everything is at the end of the day, driven by the intense pressure to search for investment opportunities, providing interesting on returns. Typically, when I meet with investors, what I hear is, "Garry, show me a deal, show me something tangible or at blind investment pool. As long as the fund has a great track record and or has a unique and very differentiated investment strategy." Bottom line, the appetite for new investment opportunities and sustainable sectors is high, while existing track record opportunities obviously are real positive. All this aside, we ourselves to Jensen Capital Partners have witnessed firsthand an increased interest from investors for opportunities in venture capital, both early stage and late stage, as well as secondaries, preferably with a focus on technology, which provide arguably high upside and ROI potential, including consumer tech, given the current health crisis and the changing consumer consumption patterns.
In fact, there has been a big increase in secondaries funds coming to market in the first half of 2020 particular driven by many institutional investors, forecasting a hectic and valuation appealing secondaries market, due to some primary investors being forced to sell out because of the financial effects of the current pandemic. In terms of the broader geographical asset allocation by investors, it's on balance, probably tilted somewhat towards the U.S. and Asia, and less towards Europe for the right or wrong reasons. Reality is Brigette, that we are in unprecedented economic territory with unprecedented and massive central bank intervention of which certainly to me obscures the looming risks for fixed income investors down the road. In other words, most definitely some challenging circumstances that we at Jensen Capital Partners definitely take into consideration when choosing the cabarets and projects we want to take on.
EA: Okay. That's very insightful. And certainly in fixed income, there's not a lot of yield either. I've spoken to various prime brokers who say they're incredibly busy with hedge fund formation and had many conversations with Fledgling, VC, PE and Real Estate Fund Founders in recent months. Is now a good time to launch a fund?
GJ:The short answer, Bridgette is yes, absolutely. There's still strong investor appetite for quality alternative asset funds. And that applies to all alternative asset classes. But let me elaborate briefly on my answer. Within the alternative asset investment space, I like to differentiate between what we are Jensen Capital Partners call long-term strategic trends, as opposed to short-term tactical trends. Long-term, we are in the middle of a strong, upward trend in investor appetite for all alternative asset classes. Assets under management in the industry, as you may know, just hit $10 trillion at the end of 2019. And expected to grow at approximately 10% per year over the next five years. In this respect, the current global health crisis has not really damaged this trend, but rather it has been a catalyst for many institutional investors with a long-term time horizon to reassess its strategic allocations and further increase its target allocation, alternative exposure allocation, in order to reduce reliance on public market concentration and volatility.
Short-term, investors made, as you know, tactical decisions and prioritize investments in certain asset classes or subclasses due to specific short-term considerations. But all these tactical prioritizations always stick within their long-term targets, strategic allocation, which as I said, is an increase in overall alternative in exposure across all asset classes. This is the reason why in the last few months, demand for hedge funds has been significantly strong, just like it was the case for secondaries private equity and venture capital funds 12 to 18 months ago. But again, this is just tactical short-term prioritization. It all fits within a long-term trend of increased exposure to all alternative assets, which does not appear to have been damaged by the current crisis. On the contrary, the future outlook for alternatives looks as good as ever.
In conclusion, we at Jensen Capital Partners are confident, based on our overall sector views and our daily conversations with institutional investors globally, that now is a great time to launch a fund focused on any type of alternative asset classes. My advice to alternative managers looking to raise a fund would be, "Do not worry about short-term considerations, i.e., whether your asset class is the investment darling of the moment, do not worry about competition, which will undoubtedly be there and it will be strong. As long as you have an offering with a quality and differentiated strategy, ideally with a proven track record, as long as there's a strong and motivated investment team, and as long as you target the right investors and you do it with the appropriate pitch, then you are highly likely to be successful in raising your fund." Again, because the appetite is out there and it is as strong as ever.
BL: That's great to know because I'm talking to so many new funds and I'd like to offer them some words of encouragement. Within your fund client base, what trends have you observed? Are fund managers going to market more aggressively and whether it's startup or not and seeking more help from outside marketers? Or are they calling full-time fundraising staff?
GJ:As mentioned earlier, Brigette, initially when the crisis struck, everyone stayed on the sidelines, uneasy about excess in the market and waiting to see whether all would pan out and the dust would settle. In the case of Jensen Capital Partners, we had to literally, hand-hold one of our clients, as we launched a significant capital raise for a tech fund, right in the midst of the pandemic, which in hindsight ended up being the right decision. As we're moving slowly back to normality, other funds are following and entering the market based on what we see and hear, maybe not at the same rate we saw prior to the crisis, but with fund managers definitely realizing that once an effective vaccine has been developed, could well open a flood gate for the demand of both public and private capital. Best to be out there now with less competition.
This aside, as you know, the value add of an outside quality and experience capital raiser is multifold, which is recognized by quite a few people operating in this space and looking for capital. Among others, capital raising is time-consuming and a capital raiser ensures that management can spend most of its time on its core business, rather than capital raising. Equally important, it's difficult to identify the right investors on your own, that can be beneficial to our business beyond merely providing financing. In other words a capital raiser can identify investors whose investment criteria fit the opportunity and who may contribute with industry knowledge, a large network of experts, origination channels, and other aspects.
BL: I believe the downside of the current crisis is abundantly clear to most of us in a recessionary environment. What is the biggest opportunity you see coming out of this crisis?
GJ: Good question. Look, the pandemic will, I believe, have quite a few losers. In addition to it's obviously awful costing human lives, the COVID-19 outbreak is creating huge economic disruption, especially in the highly connected modern world in which both trade and foreign investments are increasingly globalized. And the majority of the population is urbanized. The actual economic impact from COVID-19 will be difficult to assess until the pandemic is over as each country, will arguably be affected differently depending on its economic and trade structure.
However, there will also be some clear winners once the economy improves. Mainly, I believe, the whole technology space, as we have already partly seen as tech companies benefit from major changing, changes, I'm sorry, in consumer habits. Among others ordering increasingly align, adopting to working from home, et cetera.
BL: So you've touched on this a little bit earlier, but I want to drill down a little bit more on it, which is your thoughts on whether or not you have a time horizon in mind for things resuming a more normal pace and volume.
GJ: It's very difficult making a prediction, Brigette. But we have arguably already seen a return, as I said, of some normality with markets stabilizing and investors carefully evaluating new select investment opportunities. I think it will all at the end of the day, depending on how quickly the authorities will be able to develop a COVID vaccine and get the pandemic contained. And hopefully that will not be too far away. That said, the massive global intervention by central banks that we've seen ever since the pandemic started, has the world sail in somewhat uncharted waters that could eventually, and I don't want to sound alarming, but could end up in an inflationary disaster affecting all types of markets, but we'll have to see.
BL: Well, thank you so much. This has been very insightful to me, especially your comments regarding whether or not it's a good time to start a fund and whether you should be in the market today, raising capital and the value add that people like yourselves who are experts in that space, can offer managers who are more expert in making investments themselves. So I really want to thank you for sharing your quite valuable insights and to our listeners. Thank you for listening to the Engaging Alternative Spotlight part of the EisnerAmper podcast series. For more information on this and a host of other topics, visit EisnerAmper.com/FS.