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While the covid-19 pandemic has put the brakes on business activity around the world, in contrast, after a temporary pause and swift readjustment to the new normal, private capital fundraising has continued apace. Neither has the pandemic reversed the trend for ever-larger vehicles.
Almost half of respondents to the Private Funds CFO Insights Survey 2021 report they are currently fundraising or plan to do so later this year, slightly up on those who marketed new vehicles last year. A further 23 percent are preparing to fundraise in 2021. Almost two-thirds expect their next fund to be bigger than their current fund (for 47 percent of respondents, their most recently closed flagship funds are in the $100 million-$500 million space).
“Anyone trying to raise capital now is trying to take advantage of some dislocation,” says Cloverlay chief financial officer Omar Hassan. “This is the time when private equity tends to outperform over a long period of time … LPs that pressed pause at the beginning of this crisis are right back in the saddle. There is a more opportunistic outlook.”
“LPs are in it for the long term,” notes another CFO, whose firm invests in natural resources. “They understand cycles and just look at the core value of the investments … and how it will surf on downward cycles.”
Bumps in the road
However, collecting capital has not been totally smooth sailing. Some GPs have had to extend their existing fund’s investment period to deal with liquidity issues at the portfolio company level; the challenging investment environment has prevented some managers from meeting the deployment threshold in their current vehicle necessary to launch a new one; and they have needed to address sector-specific issues triggered by the pandemic.
There has also been hesitation about making commitments among some LPs. “For the average manager, I think it’s much harder to raise a fund during covid-19,” says a CFO at a growth investor. “Some LPs are pulling back because of liquidity issues; some are generally more cautious; some won’t back a new manager without a face-to-face meeting.” The manager’s solution: “Zoom calls galore” and the provision of a “higher quality data room”.
When the pandemic arrived, “GPs needed to take a pause to review their portfolio and re-evaluate their pipeline,” notes Joshua Cherry-Seto, managing director, CFO and chief compliance officer at Blue Wolf Capital Partners.
“On the LP side, there was also an initial pause, but very quickly they continued to deploy assets.”
“Investors still needed to put money to work,” says a CFO at a direct lending firm. But there are conditions. “[LPs] seem to prefer to go with fund managers that they are familiar with rather than attempting to vet new relationships under the current circumstances. This led to continued fundraising but skewed the allocations towards established fund managers.”
The direct lending firm’s CFO says that they managed to meet most investors in their firm’s latest fundraise face-to-face at least once before lockdown, with subsequent meetings held virtually. “We did not feel that this created any issues for either side,” they add.
Looking forward, the CFO notes that as the current remote-working situation continues, “it will be interesting to see how interaction with new investors, which we have never had a chance to meet in person, will work. But as people adapt to the new normal, we believe we can continue successfully fundraising with virtual-only meetings.”
For other GPs collecting capital to invest in specific sectors, online meetings have not proved an obstacle. In fact, the virus has been a catalyst, with the CFO of a healthcare-focused venture capital firm pointing to the high demand they are experiencing in their current fundraise. This CFO’s firm is fundraising primarily from overseas investors and communicating by video and phone.
“I think there are certainly some challenges to doing so, specifically with certain cultures,” says the CFO.
“However, it is clear that our investors and prospective investors are all facing the same challenges we are and adapting similarly to how we have adapted.”