Liquidity, the denominator effect and an increase in capital calls are top of mind for investors, according to a survey by the Institutional Limited Partners Association.
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The industry body gathered approximately 200 responses from LPs through an interactive town hall, individual interviews and ILPA’s online discussion forum in March. It found that 63 percent of LPs are either somewhat concerned or extremely concerned about exceeding their policy target to private equity.
“If 10 years ago this happened, it would have impacted us a little bit, but we had not met our allocation – we had room. We are more concerned today because we were at or slightly above our allocation before this occurred,” said one investor in the survey.
More than half of LPs said capital calls have increased since the onset of covid-19, with GPs engaging in anticipatory drawdowns “to get headroom in the event of an LP liquidity crisis”. More than half of LPs also said they experienced a change in capital calls in the past two weeks related subscription line use.
In terms of the expected pacing of commitments this year, some LPs are open to changing strategies and want sufficient flexibility to take advantage of opportunistic vehicles, ILPA found.
“We do a lot of mapping for the year on re-ups … we are looking at whether we should [make changes] to fund other more opportunistic distressed opportunities … We will see a wave of these coming across our desks,” another investor said.
Close to 30 percent of LPs polled see no change in their commitment to private equity, while some 12 percent are pausing on new commitments.
LPs in the survey also noted that declining valuations, rescue financing and subverting potential alignment and legal issues are being considered in the current environment. While few LPs have been approached to provide financing, the survey found that LPs have different opinions on the risk of rescue financing. Some are considering it with the assets and GPs they already know; others are taking a more measured approach by first tracking potential rise of conflicts and misalignment issues.