Eaton: Large US institutions grappling with capital calls

The advisory firm is working on solutions for LPs that may not have sufficient liquidity to meet a capital call, partner Peter Martenson tells PEI.

US institutional investors are questioning their ability to honour fund commitments as a result of coronavirus, according to a private capital advisory.

Eaton Partners has been contacted by limited partners that have “intimated that they’re having trouble making capital calls,” Peter Martenson, a San Diego-based partner at the firm, told Private Equity International.

See all Private Equity International’s coverage of covid-19 and its impact.

“These are large US institutions that have had the issues, or at least been the ones to recognise them early and been proactive about getting in front of this,” Martenson said.

“We’re working with them on it, but the first thing we recommended was to call the GP and give them a heads up, because it’s something you want them to know now. The second part we’re working on is a credit line to help fund up should they need to, though right now it looks like they won’t receive a capital call in the near-term.”

More than half of LPs say capital calls have increased since the onset of covid-19 as GPs look for headroom in anticipation of an investor liquidity crisis, according to a March survey by the Institutional Limited Partners Association.

Liquidity is in question due to a smaller number of realisation events and concerns that a rout in the public markets will trigger the denominator effect.

“Investors might have planned to do ‘x’ hundreds of million this year but if they’ve had no revenue for the past six weeks, from collegiate sports or from their hospital system, the dollar amount going out of the door is being cut back,” Martenson said.

Liquidity solutions include offering a preferred return to an equity investor willing to fund the capital call, selling the LP interest on a secondaries buyer and arranging a credit line secured against an investor’s existing assets under management. Lender sources say the latter would typically be structured as a corporate-level revolving facility and could be used for any working capital needs.

The concept of investors leveraging their portfolios isn’t new: California Public Employees’ Retirement System, the US’s largest public pension fund, said last June that it was considering the move in anticipation of an impending downturn, as reported by sister title PERE.

Preparation is key

Proper monitoring and planning ahead can help avoid having to sell public securities to raise money for capital calls, Steve Moseley, head of alternative investments at Alaska Permanent Fund Corp, told sister title Buyouts earlier this week.

“In Alaska we’re monitoring liquidity even more carefully than before the crisis – we have a morning call daily to make sure we know how much cash we have and how much we’ll need on a running weekly basis,” he said.

“In happier times that was a weekly conversation. That hypervigilance reflects a desire to avoid unplanned sales of liquid securities though, rather than a concern that we won’t be able to pay our grocery bills (or meet capital calls).”

One in five LPs intend to make fewer private equity fund commitments in 2020 compared with their plan for the year as a direct result of covid-19, according to a recent PEI survey. Meanwhile, 12 percent will reduce the planned average size of commitment.

The results chime with Eaton’s latest LP Pulse Survey, which found that 18 percent are reducing their private market allocations – in this case understood to mean new commitments – modestly and a further 3 percent significantly. A majority (64 percent) will keep their allocations the same, while 15 percent of respondents will increase them.

“Most CIOs have decided to stop committing until they know what the market bottoming out means and how it will flow through their portfolio,” Martenson said. “[…] Some are focused on just re-ups and others are looking for the best ideas to take advantage of the dislocation out there.”