Liquidity, the denominator effect and an increase in capital calls are top of mind for investors, according to a survey by the Institutional Limited Partners Association.
The industry body gathered approximately 200 responses from LPs through an interactive town hall, individual interviews and ILPA’s online discussion forum in March. It found 63 percent of LPs are either somewhat concerned or extremely concerned about exceeding their policy target to private equity.
“If 10 years ago this happened, it would have impacted us a little bit, but we had not met our allocation – we had room. We are more concerned today because we were at or slightly above our allocation before this occurred,” said one investor in the survey.
More than half of LPs said capital calls have increased since the onset of covid-19, with GPs engaging in anticipatory drawdowns “to get headroom in the event of an LP liquidity crisis.” Nearly half of LPs also said they experienced a change in capital calls in the past two weeks related to subscription line use, with another 13 percent saying no explanation was given to them by their GPs as to why capital was being called.
ILPA’s interaction with members suggests the increase in subscription line-related calls has partly to do with GPs bumping up against LP limits on sub line use. “GPs will naturally be using calls to pay off earlier investments that are reaching LPA limits on how long they can be on the line,” said one investor in the survey. ILPA recommends that LPAs limit the amount of time a subscription line can remain drawn to 180 days. “Some GPs may be paying down credit facilities and calling money from LPs to make sure they have ability to borrow if need be. Other GPs are planning to max out the credit lines now while they still can,” said another investor in the survey.
In terms of the expected pacing of commitments this year, some LPs are open to changing strategies and want sufficient flexibility to take advantage of opportunistic vehicles, ILPA found.
“We do a lot of mapping for the year on re-ups … we are looking at whether we should [make changes] to fund other more opportunistic distressed opportunities … We will see a wave of these coming across our desks,” another investor said.
Close to 30 percent of LPs polled see no change in their commitment to private equity, while some 12 percent are pausing on new commitments.
More than a third of the LPs surveyed said that fund closes are being postponed, though a similar amount said fund raising activity hadn’t changed at the time of polling in early April. Some fundraising timelines appear to have accelerated, with 12 percent of LPs saying they saw more closes or shorter windows to close. And 13 percent said new fund launches are being delayed.
LPs in the survey also noted that declining valuations, rescue financing and subverting potential alignment and legal issues are being considered in the current environment. While few LPs have been approached to provide financing, the survey found that LPs have different opinions on the risk of rescue financing. Some are considering it with the assets and GPs they already know; others are taking a more measured approach by first tracking the potential rise of conflicts and misalignment issues.