Heard on the streets of Hong Kong

Cov-lite loans, fundraising pain and longer holding periods were on the minds of private equity practitioners who gathered for an industry conference last week.

Super-typhoon Mangkhut dominated much of the discourse for the private equity professionals making the journey to Hong Kong for an industry conference last week. Private Equity International had feet on the ground at the JW Marriott Hotel to discover what was on industry practitioners’ minds.

A tale of two raises

“Look around, see how quiet the lobby is now, that shows we are in a difficult fundraising period,” a pan-Asian fund manager told PEI. “Big GPs are raising quickly but smaller GPs are struggling.”

A perfect storm of factors has contributed to a two-speed fundraising environment. A favourable exit market has led to strong distributions in recent years, putting institutional investors under pressure to deploy large sums of capital. Likewise, a trend towards fewer general partner relationships among some limited partners has led to strong demand for multi-platform managers that provide access to a variety of asset classes.

While raising capital for blue-chip firms may seem easier than it has been for a decade, the headline figures may not represent the struggle faced by GPs that don’t have capacity for substantial commitments. Such a divergence has led to some managers offering concessions in fund terms to attract investors.

Lessons unlearned

“People are returning to the bad behaviour of 2007-08, but worse.”

This was the view of a US mid-market firm executive who expressed concern over the rising use of cov-lite loans. The exec’s comments are justified: in 2006 just 0.95 percent of outstanding leveraged loans in the US were cov-lite – devoid of all maintenance covenants – according to data from LCD, part of S&P Global Market Intelligence. In July last year that figure was a whopping 72.7 percent.

Cov-lite loans can be no more risky for PE houses than those with a full set of covenants – a prudent GP will closely monitor the financial performance of its portfolio company and should be able to anticipate potential issues and deal with them appropriately. Still, an extremely borrower-friendly market is pouring accelerant on the mountain of dry powder available for private equity, driving prices higher and higher, as PEI wrote last year.

Long-holds are the new black

“When we have the next global financial crisis there could potentially be pretty serious capital flight out of the public markets,” a senior executive at a regional Asia-Pacific fund manager told PEI.

“It certainly might affect us holding deals longer which is fine, but it means that listing at a great multiple of earnings is not really an option. Then we’ll have to be more focused on exits to strategic buyers.”

The GP is in good company. Partners Group is among the latest firms to have embraced longer holding periods amid increased focus on value creation to generate stable cashflows. CVC Capital Partners, KKR and BlackRock also have funds dedicated to the strategy.

– Carmela Mendoza and Isobel Markham contributed to this report.