Adams Street Partners, which surveyed 110 institutional private markets investors in Asia, Europe and North America, found that 85 percent of respondents plan to increase commitments to existing managers this year, while 70 percent are adding new managers to their portfolios. LPs may desire to “invest ahead of the expected economic rebound”, the firm reported.
Certain types of LPs – such as endowments and healthcare systems – that might have dealt with liquidity restraints in their underlying mission-based operations last year have become more active since January, says Julian Pearson, a founding partner at placement firm FirstPoint Equity.
“Institutional LPs, especially those with actuarial hurdle rates and pension liabilities, have to deploy capital in higher returning asset classes to keep up,” he says. “They can sit on the sidelines for two to three quarters and only do re-ups, but that’s not really feasible for longer time periods.”
Last year proved to GPs and LPs alike that virtual fundraising works, and they expect the trend to continue even after we emerge from the pandemic. More than 90 percent of investors are willing to conduct an initial meeting with GPs entirely virtually, according to Private Equity International’s LP Perspectives 2021 Study. Additionally, more than half of LPs are willing to commit capital to a fund without meeting the manager in person, the study found.
“I think the success of fundraising by Zoom – while no comparison to face-to-face interaction – has somewhat surprised us all,” Pearson says. “Cutting out time-consuming travel for roadshows has allowed greater efficiency and market penetration quicker, for the right managers.”
FirstPoint received over $2 billion of total commitments last year, of which over half was for renewables and impact related funds, Pearson says. The firm hit the target for a European renewables manager within six months via virtual fundraising, and it held a $300 million first close for a maiden infrastructure fund in 12 weeks.
That mix of climate and impact-related strategies will be even further exaggerated by the end of 2021, says Pearson, adding that raising the same amount of capital via traditional methods would have taken far longer.
Pearson says many GPs who could afford to stay out of the market during 2020 did so. As a result, FirstPoint is now “seeing a greater flooding of the market with opportunities since the beginning of the year”.
The focus on home markets has also grown due to remote working and will continue into 2021, with exceptions for existing relationships or strategies and regions where LPs have extensive experience.
A London-based CIO tells PEI his global investment consultancy has been “in a lucky position” to have a deep and well-connected team in Europe, and that allowed the firm to find and allocate capital to new names last year.
Brexit moving into the rear-view mirror has also helped LPs go forward with a bit more certainty on how and where to deploy capital, the CIO says.
For FirstPoint, fundraising in the last year marked a tilt towards renewable energy, climate-adaptive infrastructure, digital infrastructure, technology and healthcare. Pearson says the firm has witnessed a continued rotation away from carbon-related extractive strategies toward decarbonising and sustainable approaches, with infra and agriculture being the main beneficiaries.
LPs with more mature programmes are also looking to add esoteric strategies around the edges, such as drug royalties, agriculture and GP stakes funds, Pearson adds.
Re-emergence of emerging managers
While raising capital for a first-time fund has never been easy, the pandemic made it especially difficult. Few expect 2021 to see a major uptick in emerging managers. “It won’t be a banner year for first-time funds in 2021, but it will be much better than 2020,” says Lara Banks, managing director and co-head of private equity at investment consultant Makena Capital Management.
“We expect more new GPs to come to market in the second half of the year. Some managers that were thinking about launching in 2020 decided to push out fundraising, while others raised capital on a deal-by-deal basis. There is increasing appetite in first-time funds among LPs given the possibility to meet again in person.”
A significant number of new GPs are offering co-investment opportunities, with the typical no-fee-no-carry arrangement, she adds. In the buyout space, most of the co-investment deals Makena has seen are around software and services companies.
By the numbers
Private equity funds gathered $535.2 billion in 2020, the third largest amount in the past six years, even as the pandemic raged, according to PEI’s Fundraising Report 2020.
While the aggregate fundraising volume last year dropped 19 percent from 2019, it was still 11 percent greater than 2018.
Re-ups and the flight to familiarity were favoured in a year in which LPs and GPs have had to adapt virtual due diligence. That resulted in the smallest number of funds (906) getting closed since 2015.
Market participants say established managers for the most part have been able to hit their fundraising goals. The biggest buyout shops – Apollo Global Management, Blackstone, Carlyle Group and KKR – grew their assets under management by between 8 percent and 37 percent in 2020, according to the firms’ full year 2020 results.
On the other hand, emerging managers – who have the greatest impetus to meet new LPs and establish relationships – have had to push out their fundraising timelines.