This article is sponsored by MVision
In late March, when discussing future fundraising trends with Mounir Guen, chief executive officer at MVision Private Equity Advisers, one subject could not be avoided: coronavirus. Covid-19 had forced much of Asia and Europe and parts of the US into lockdown in the hopes of slowing its spread. We asked Guen what this unprecedented interruption to everyday and commercial life would mean for the industry this year and over the longer term.
What impact will the global shutdown have on fundraising in the immediate future?
Before you even consider the covid-19 outbreak, there is a more significant underlying trend to bear in mind. By the beginning of this year, most LPs had already identified their 2020 allocations with a high re-up rate. That meant the ability of some GPs to access new LPs was virtually zero as of January. If a manager wasn’t on an investor’s list then, they would have to wait until next year to get their attention. In the US, if a manager wanted to access public pension funds’ emerging manager programmes for the first time, it was going to be slow and hard for them before this virus. This situation is even more extreme than in 2019 when LPs had fully committed their year’s allocations by May/June. In this sense, covid-19 is irrelevant because LP money is already accounted for.
That said, the global shutdown might impact the timing of some mega-fund closes expected in May and June. Those might be delayed simply because of logistics, the challenges of distance-working and completing documentation. But those GPs have their relationships in place. Their funds are going to close at some point.
The real difficulty is for GPs seeking to build their book of new investor relationships and those GPs that are not yet core to an LPs’ portfolio. Irrespective of fund size, fundraising momentum there has slowed, or marketing has been put on hold. Typically, managers actively building new LP relationships would connect in person with executives at a prospective investor, build chemistry and get them excited about their story. All of that is on pause.
Will the virus alter the way LPs and GPs communicate?
Scheduled annual meetings are either being held remotely or postponed until the autumn. But the way GPs and their investors communicate was already changing and becoming more flexible due to budget and time constraints at big public pension funds and sovereign wealth funds. Particularly for managers and LPs with established relationships, the need for in-person meetings is declining. Those LPs with mature private equity portfolios are in constant contact with their 20 or 30 core GPs.
In terms of technology, during a fundraising, we frequently host weekly video calls. Virtual data rooms are well supplied with content for investors to access and follow up over the phone or by video conference.
Again, in the immediate term, the issue arises for GPs trying to establish new relationships or for first time funds. Face-to-face meetings are part of LP due diligence. For example, LPs have a fiduciary duty to visit a new GP’s office to confirm they exist before they will commit. That’s difficult while covid-19 containment measures are in place.
Will this immediate crisis have a longer-term effect on how these funds are invested?
It is not easy to deploy right now. As a GP, how are you going to invest? What are you going to invest in? First, managers need to consolidate and then take control of their portfolios. There is a definite slowdown in deal activity and LPs are very sensitive to deployment – that’s critical to them. It could be tricky for GPs in the medium term as investors will not continue relationships unless a fund is able to deploy. However, GPs that take the view that once this virus has passed economic recovery will be sharp and rapid, will sit out this pause in activity. The more pessimistic will be more cautious. My personal view is that by the autumn of this year we will be through the worst of this crisis.
How could it impact portfolio company performance?
For private equity managers, a critical benefit is that they control the businesses they invest in, so they can take measures such as placing projects on hold. GPs have a huge box of tools at hand with which they can help companies weather this stormy period. And the low price of debt means business will be able to find funding solutions. It is about buckling down for the next six months.
What does this pause mean for future returns?
This situation isn’t about a flaw in the economy. It is not the same as big banks collapsing and governments and regulators having to intervene. This crisis is because of a virus that will peak and things will settle eventually. As economies slow, governments around the world are offering support to individuals and businesses. Interest rates are historically low, and businesses will be able to borrow. The moment the virus threat begins to fade and borders re-open, the economic bounce-back from this will be positive and quick. Those funds that have adapted will do very well.
Mounir Guen outlines the key trends driving fundraising and commitment decisions
Number one, there is very little new capital coming from LPs. The market has peaked in terms of available capital per year. Most of the larger LP private equity programmes are still growing, but when you look at the injection of fresh capital in the market, it’s not high. It’s the same investors putting money to work with the same GPs.
In the US, interest rates mean there is pressure on LPs to generate returns. There will be demand to increase allocations to alternatives, but it won’t create a spike in allocations to private equity. In Europe, a handful of mega-funds are sucking up the majority of fresh cash, which means some GPs will be overlooked. In Asia over the past 12 months, there were probably about two dozen family groups that started to invest in private equity. They like direct investing and commit to managers that they co-invest alongside. This is positive but it does not constitute billions of new dollars entering the Asian market at this time.
This echoes a second major trend that continues to impact allocations: LPs are becoming much more orientated toward direct and co-investments. These are becoming an important part of an LP’s alternative portfolio. A third theme relating to portfolios is that the secondary market has become very transaction orientated, both LP and GP led. I see that continuing.