Fundraising ‘tipping point’ is harder to identify in covid-19 world – report

Private equity managers are getting more access to LPs with today’s digital work environment but assessing whether a three-hour video conference will lead to a capital commitment has just gotten tougher.

This, according to the latest LP Sentiment Update by placement agent and advisory firm Campbell Lutyens, which found that the conventional “tipping point” in a due diligence process has been harder to identify in the ‘new world’ of virtual meetings.

“In the [pre-pandemic] old world, if a GP gets a half or full day visit from an LP, experience shows that the LP is 75 percent likely to commit to the fund,” according to Andrew Bentley, partner and head of Campbell Lutyens’ Europe private funds team.

“Because it was a material commitment of the LP’s time and costs, often including travel, it was clear that they were making a proper commitment and beyond just window shopping,” he added.

With the restrictions in travel upending due diligence processes, GPs need to do video calls, a series of follow-ups, a virtual DD session, as well as a number of meetings with investment committee members, the report noted. “With the on-site due diligence tipping point missing, due diligence becomes more iterative and the decision to take an opportunity to IC becomes a key indicator of interest,” according to the report.

Said Bentley: “The new world of virtual meetings makes it easier to connect, but makes it harder for GPs and advisors to assess the fundraising progress quite as well. This is important when a GP is in mid-fundraise – trying to assess real demand and how many more LPs we’d need to speak with becomes slightly more difficult to judge.”

Are LPs really able to commit virtually?

Despite increased adoption of virtual diligence processes, LPs are still finding it difficult to commit to managers without a face-to-face meeting, the survey found.

Over half of LPs (54 percent) polled are willing to hold on-site due diligence virtually, yet less than a quarter said they can fully underwrite a commitment without an in-person meeting. Meanwhile, 39 percent are able to commit virtually pending one in-person meeting. In general, respondents are more inclined to underwrite large GPs or GPs with which they have warm relationships, the report noted.

There are also regional differences among LPs’ abilities to commit virtually, the survey found. North American LPs are the most “virtually open” as LPs come to terms with the necessity to commit virtually. LPs in Europe, Middle East and Africa, on the other hand, have a clear preference for holding at least one virtual meeting before making a fund investment. And similar to EMEA LPs, investors in the Asia-Pacific region are considering virtual commitments for well-known GPs.

Tech-focused buyout shop Tenzing Private Equity raised £400 million ($499.9 million; €442 million) in June for its second fund without a single face-to-face meeting. In August, Nordic Capital reached a first close on its 10th fund after launching in March, raising more than €5 billion in a fully digital capital raise.

For first-time fund managers, Bentley noted start-to-finish virtual capital raising is possible and may simply take longer. GPs would also need to focus on connections they have built in the past.

“For now our guidance to LPs in fundraisings is: ‘Pursue the discussions online and we will do our absolute best to arrange a meeting somehow somewhere at some point in the next few months.’”

Campbell Lutyens surveyed close to 600 LPs from March to August for the report.