GPs seek investment period extensions

Montagu, BC Partners and MatlinPatterson are among the firms whose LPs have granted fund investment extensions.

Earlier this year, limited partners granted distressed specialist MatlinPatterson a one-year extension of the investment period on its $5 billion third fund, which closed in 2007. 

Led by Mark Patterson and David Matlin, the firm needed the extension because distressed investment opportunities had dried up as the markets recovered, and wanted more time to deploy capital. The option to ask for the extension is built into MatlinPatterson's limited partner agreement. Distressed debt funds usually have three-year investment periods along with provisions that allow them to recycle capital for a period of time. MatlinPatterson declined to comment.

MatlinPatterson is not alone in its extension request. As investment periods on funds come to an end, firms are being forced to go back to LPs to get more time. The investment periods generally last five years, so funds closed in 2005 and 2006 are approaching the end of their investment cycles. Those funds were raised at the height of the credit bubble and collected historic amounts of capital.

The global private equity industry has about $425 billion in unspent capital waiting to be deployed, called an “overhang” by consultancy Cambridge Associates, which published a report recently on the situation. Cambridge initially estimated an “overhang” of $445 billion, but revised that estimate down to $425 billion through the end of 2009.

Numerous firms this year and last have asked their LPs for more time to find blockbuster deals. UK-based BC Partners earlier this year won a one-year extension from LPs on its €5.9 billion 2005 fund. Montagu, a mid-market buyout firm, reached agreement with investors earlier this year to extend the investment period on its €2.26 billion fund until July 2011. A source close to the firm said Montagu didn't feel market dynamics were advantageous to deploy capital and did not want to be forced to overpay for assets.

This is the most I've ever seen. We've gone from none for many of the 10 years I've been here, to half a dozen to a dozen in the last 12 months.

Andrea Auerbach

Several sources told PEO that more private equity firms have asked for extensions in 2010 than they have ever seen before.

“This is the most I’ve ever seen,” said Andrea Auerbach, a managing director with consultant Cambridge Associates. “We’ve gone from none for many of the 10 years I’ve been here, to half a dozen to a dozen in the last 12 months.”

One principal at a family office recalled a lot of requests for extensions from venture capital firms after the tech bubble imploded earlier this decade. “Sometimes they’re begging for a ‘hail mary’ to make up for some of the real bad investments in previous years,” he said.

The reasons for the extension requests vary, according to LPs. GPs have argued they have prudently been patient with their capital, and need more time to find quality deals, sources said.

“A lot of managers were unable to deploy capital at the rate to which they’ve become accustomed. Those managers are trying to invest remaining commitments prudently, and they need more time to do that,” Auerbach said.

LPs have options when they get an investment period extension request. If they reject the request, the investment period expires, and any remaining unfilled commitments disappear. Many LPs have been granting requests with concessions, generally some kind of management fee reduction.

“I think a lot of LPs are using any type of an amendment or extension request as another opportunity to potentially re-underwrite their view of that particular manager,” Auerbach said.

Every investment extension request needs to be considered on its own, LP sources told PEO. There is no universal approval or rejection for the requests – many factors go into the consideration.

“We don’t do a full diligence effort but we treat it like a new request for capital,” the family office principal said. 

Several sources said they haven’t yet seen a GP make an extension request, get rejected, and simply have to end the fund before all the capital is drawn. But sources did say they expected to see that happen.

One investment professional at a US public pension said granting the extensions usually makes sense if the GP has “done a good job”.