One in five LPs to slow PE commitments due to covid-19

An exclusive investor survey conducted by PEI reveals three quarters of LPs will not reduce their target allocations to private markets in the face of the denominator effect.

One in five investors intends to make fewer private equity fund commitments in 2020 compared with their plan for the year as a direct result of covid-19. While 12 percent will reduce the planned average size of commitment.

So says a recent Private Equity International survey, in which 77 institutional investors gave their views between 25 and 27 March on how their institution was responding to the pandemic.

See all Private Equity International’s coverage of covid-19 and its impact.

In the main, however, LPs are making their game plan clear: no sudden movements in the face of a highly volatile and rapidly changing situation. They will not be looking to make major changes to their private equity programme as a result of the covid-19 pandemic or in response to the denominator effect that is likely to hit investment portfolios.

Investors are still bullish on co-investment too: more than two-thirds (68 percent) have no plans to reduce co-investment activity levels, 17 percent are considering it, while 14 percent intend to reduce co-investment.

Just 5 percent said the likely denominator effect will cause them to be more active sellers on the secondaries market.

The limited partners’ planned approach to the current crisis is in line with what Todd Silverman, who leads the private equity research team at investment consultant Meketa Investment Group, has been advising the firm’s LP clients.

“Right now, we’re advising a cautious approach, and generally to not make any major changes to long term strategic plans or asset allocations,” Silverman told PEI last week, cautioning against “letting short-term volatility or emotion dictate decision-making”.

“We are not recommending in any cases that I can think of offhand that clients completely pause their allocations. That’s not to say there might not be a need for slight adjustments to commitment budgets for the year. But I think those would be relatively modest in most cases.”

One area likely to see some impact is fundraising by first-time fund managers. A third of investors indicated they will either stop all new investments with first-time funds or reduce their exposure to such vehicles.

First-time funds can be a tough sell with investors in the best of times: nearly half of respondents to PEI’s LP Perspectives Survey 2020 said they only invest opportunistically in first-time funds, while 37 percent said they do not plan to back such funds in the future.

Those first-time fund managers who have not had the chance to hold in-person meetings with LPs will find it tough to generate momentum for a fundraise in the current environment, sources have told PEI in recent weeks.

LPs are having a tougher time getting their arms around the status of their current investments in a situation that’s changing by the day. Almost two-thirds of respondents indicated they do not feel they have good visibility on the impact of covid-19 on their funds’ portfolio companies. Just 8 percent said they had excellent visibility.

This is despite LPs reporting frequent and broad communication from GPs keeping them up to date on the status of portfolio companies, vulnerable spots in funds, and actions managers are taking to defend investments. One investor, speaking to sister title Buyouts, described GP communications as “the best I’ve ever seen”.

“I’ve been on call after call with managers communicating what actions they’re taking in portfolio companies, how their business operations are going to be altered by this,” said the investor.

Silverman said he’s seen a lot of understanding among the LP community of the fluidity of the situation.

“There’s an understanding the GPs will, by necessity, be able to only provide a certain amount of information that might quickly become stale,” he said, adding LPs are looking for managers to share as much information as they can at that moment.

“There’s an acknowledgement that GPs are being accessible while also appropriately focusing on the portfolio and on preserving and maximizing value there.”