GPs are pushing for greater flexibility on fund terms including extensions and borrowing limits, a report from Proskauer Rose has found.
Most of these “shifts around the edges” grant GPs the flexibility to hold assets longer to extract more value and address portfolio needs during the pandemic, the law firm noted in Under the Microscope: European Fundraising Terms and Trends 2021.
Proskauer’s analysis included 90 Europe-focused buyout funds raised between November 2019 and April 2021. The target size of the funds reviewed ranged from €90 million to €18 billion, with all the funds combined representing about €225 billion in capital raised.
Nearly 90 percent of funds have an initial term of 10 years. Few funds that bucked this trend in previous years were larger than €1.5 billion. Between 2020 and the first quarter of 2021, there were more longer-term funds across other size brackets, the report found.
“Over the last few years, continuation funds have become more popular, and sponsors and investors have rapidly become familiar with them as a way of dealing with the limitation of a 10-year fund term,” Aranpreet Randhawa, a Proskauer partner, told Private Equity International.
Randhawa added that GPs need to have a clear business case for moving an asset to a continuation fund and noted that investors are generally supportive when sponsors have communicated the process clearly in advance and suitable liquidity options are available.
BC Partners, Blackstone and EQT are among the firms that have either used continuation vehicles or transferred assets into successor funds. TA Associates also has a fund that allows it to double down on its best assets; it gathered $1.5 billion in June for a sophomore vehicle focused on that strategy.
Proskauer found a shift in the GPs’ favour on extension of fund term requests. About 41 percent of funds it examined give the GP discretion in relation to at least one extension, up from 36 percent last year.
“Where approvals are required for an extension of the fund term, we’ve seen a shift in the GP’s favour,” Randhawa said. “Compared to last year, more funds allow the GP to extend for one year without any LP involvement. Where there is LP involvement, we have seen some funds shift from the need to go to the entire LP base for approval to extend, to needing to only go to the LPAC.”
Larger funds continue to show the “highest degree of investor involvement in an extension decision”, the report noted.
The report found that just 44 percent of funds have broader recycling rights during the investment period, down from 59 percent last year. “Interestingly, the data here bucks the trend that we expected to see, likely driven by successor funds adopting recycling provisions of their prior fund,” the report stated.
Similar to previous years, fund-level borrowing sits between 20 percent to 30 percent of commitments for the majority of funds (73 percent), although GPs – particularly larger funds – are trying to get more flexibility around this.
“We have seen some GPs looking to build in the ability to enter into longer term borrowing for new funds or asking for investor approval to amend existing fund documents to do this,” Randhawa said. “NAV and hybrid facilities have been particularly useful over the last year as a way of providing additional support to portfolio companies. GPs of course also have access to recyclable capital for this, but these facilities provide an additional option.”
Randhawa added that some funds are trying to broaden the purposes for which they can borrow, outside of the typical capital call facilities, with different limits applying to these other borrowings.