Investment extension-lite

As a number of boom-year vintages creep closer to their investment deadlines, more fund mangers are likely to request additional time to deploy capital. Some requests will be accepted, with many funds featuring built-in extension options to their LPAs.

Others, meanwhile, will be denied by today’s weary limited partners; competition for good deals (and attractive financing) is fierce, markets are characterised by uncertainty and many firms are managing multibillion funds that were raised with healthier markets in mind.

Some, such as 3i, won’t ask for full extensions on funds whose investment periods are near their end, but will rely on a commonly negotiated provision which allows GPs to pursue deals already under advanced stages of due diligence. Most investors would be unlikely to block a good investment opportunity already underway (and which underwent countless hours of analysis) simply because the fund’s investment window shut.

Industry sources say it’s likely that firms in similar positions will do the same, seeking a middle ground of sorts with their investors. That way limited partners can extend an investment period while simultaneously restricting dealflow to any range of criteria or specific transactions they find suitable.

Different funds have different tests for how far advanced a deal must be before a GP can call down capital for a post-investment period acquisition. Most LPAs can be amended to green-light promising deals, even capping the amount of time GPs have to close it. Should not all of a fund’s LPs agree to any of those measures, then those wishing the fund manager to make further investments can create side-vehicles. Or, as some LPs already allow, GPs can be permitted to reinvest fund proceeds in lieu of distributing cash.

As more funds bump up against their investment period, billions in undrawn commitments will need to be invested. But as the scenarios outlined above demonstrate, traditional fund extensions are not the only option. There remains a lot of middle ground – good news for smart, hardworking managers with promising deals in the pipeline.