The coronavirus crisis has created an unprecedented market environment for fundraising: first-time fund managers face challenges launching fundraises and capital raising timelines are expected to lengthen for all but the most in-demand funds.
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For any GP considering seeking a fundraising extension, pushback from some LPs should be expected.
“Covid-19 is a force majeure event, but I am not sure it will persuade all LPs that it alone is a good reason to extend,” Andrew Bentley, partner and co-head of Campbell Lutyens’ Europe private funds team, told Private Equity International.
This is particularly true for funds that have already been in market for nine months or more and want more time to raise capital. Bentley noted it will very much depend on the manager, and whether six months’ additional marketing amid new – and future – market conditions is likely to be well spent away from the portfolio.
LPs are generally supportive of fundraising extensions if there are special reasons, market participants told PEI. LPs are typically supportive of extensions to allow a fund to at least reach the minimum size needed to execute the strategy and provide an acceptable level of diversification, said Julian Pearson, a founding partner at placement firm FirstPoint Equity.
“Existing LPs also want GPs to be focused on making great investments, rather than pounding the streets marketing for a prolonged period of time,” Pearson said.
If a fundraise is already at an advanced stage, LPs will scrutinise the quality of the process and push for a highly focused list of potential LPs to be approved for marketing to during an extension period, rather than widespread marketing, Pearson added.
Granting fundraising extensions will also depend on the amount of capital raised, noted Rhonda Ryan, a partner and head of European private equity at Mercer.
“Either they think, ‘great, you are not going to raise as big a fund as you said’, or they think the fund isn’t appropriately sized,” Ryan said.
Ending up with a smaller-than-planned fund means a GP might have a concentrated portfolio and that is not in the LPs’ interests, she added.
“For example, if a GP is targeting 15 investments for a $1 billion fund and it only raised $500 million, they may only deploy that amount in seven investments, and that’s not ideal.”
Extending the clock
Seeking a fundraising extension is straightforward: the GP presents the case to LPs in its limited partner advisory committee – often made up by LPs who were in the first close, or those that meet a certain criteria, for example, ticket size – and a vote takes place.
One of the placement agents PEI spoke with noted their firm is working with several GPs who had held first closes and who will now need to extend because they were not able to advance the next tier of in-person LP meetings due to travel restrictions. The placement agent expects these extensions to be approved by the LPACs.
While fundraising extensions are granted on a case-by-case basis, these are only relevant for GPs who have already had a first closing.
Mounir Guen, chief executive of placement firm MVision, said that while extensions are typically sought for six months, he would recommend funds in the final stages of capital raising which are not closed yet to seek extensions to the beginning of 2021.
Coronavirus-related disruptions may endure for months and possibly much longer, he added.
‘Not a likely cure’
Another setback for funds that have yet to hold final closes is that a number of them will have already made investments and may have seen the value of their investments impacted in recent weeks.
“They’ve already got seed investments in their fund that they are raising and covid-19 has just affected public markets by 20-30 percent, so those seed assets may well be already showing a loss. This will make closing more capital more difficult than in a fully blind pool fund,” Bentley pointed out.
Market participants agreed the coronavirus crisis is going to mean GPs who are finding it difficult will only find it more so, and more time via fundraising extensions is unlikely to ease the struggle.
Seeking extensions for fundraising can raise awkward questions, and GPs are working out how much leeway they can have with LPs, said Eamon Devlin, a partner at law firm MJ Hudson.
“Right now no LP knows exactly how much they have to spend in the next six months. They don’t know three key factors: they don’t know how many new deals the GP will do, they don’t know how many deals the GP has where they’ll need more money to save them, and they don’t know the rate of repayment of any fund finance facilities,” Devlin said.
“Some of the industry is in the deep denial phase of this crisis. GPs are working very closely to work out with the LPs how much money’s available over the next two quarters.”
– Adam Le contributed to this story.