The coronavirus outbreak has inevitably hit the amount of money both raised and deployed by private equity managers. It also raises important questions for asset owners around how the industry will move forward.
General partners are far less likely to invest if they can’t meet a company’s management team or touch a physical asset. Consequently, the need to raise cash is not so urgent right now – and in any case, clients, or limited partners, may be less inclined to commit capital in such an uncertain environment, especially to new funds or managers.
One London-based private equity limited partner told AsianInvestor: “If travel restrictions remain in place, can we ultimately carry out due diligence to the necessary standards? Might you even end up investing with a manager that you’ve never met face-to-face?”
Given the importance of meeting new managers, such a setup is clearly beneficial, although typically only the larger institutional investors can afford to set up overseas branches.
This is obviously less of a question for institutional investors with local offices in various markets, the LP executive said on condition of anonymity. They are better placed to do direct deals or to meet managers in countries where they have boots on the ground – in situations where travel restrictions are loosened domestically but international travel remains restricted.
Yet most investors, like Korea’s Public Officials Benefit Association (Poba), must be content with remote activity these days, which can work when there are established relationships.
"If LPs re-up [with] the existing GP, due diligence could be eased," said Jang Dong-Hun, chief investment officer of Poba, with W13.9 trillion ($11.7 billion) under management. But on-site due diligence is necessary for GPs with whom the firm has never invested, he noted.
Lately investors have shown extra caution in re-upping with managers, so entirely new commitments are likely a step too far, confirmed a Hong Kong-based placement agent.
“[For] someone who’s going to put $100 million or $500 million into an investment, you’d think they’d actually want to see the people and walk in their office, see their systems," he said on condition of anonymity.
Yup Kim, senior private equity portfolio manager at the $67 billion Alaska Permanent Fund, agreed that “for new relationships and new managers, fundraising might slow” in the face of lockdowns.
“I do think that in times of stress and volatility there is a tendency for a flight to quality in terms of recognisable brands of firms and classic tried-and-true strategies,” he said last month during a webinar organised by Real Deals.
It may be, though, that remote fundraising can at least become more widely accepted – as it has for banks doing bond and IPO roadshows, for instance – if not wholly a replacement for personal contact.
“Many of the virtual fundraising ideas being adopted by non-profits are creative and may lead to similar approaches being used by the fund manager community,” Scott Peterman, a partner at law firm Orrick, told AsianInvestor.
This will be helped by continued improvements in technology, he added. “It must be said that the quality of current-generation video conferencing is exceptional and likely to reach a new, higher standard with the broad-scale adoption of 5G networks.”
Ultimately, after all, there is still pressure on asset owners and, in turn, their managers to deploy capital, albeit tempered by worries about the uncertain climate.
“LPs still remember that investing in recession vintage years generate some of the best returns across every decade,” Kim said, “so I expect most institutions… to commit to pre-Covid-19 [allocation] levels as best they can.”
“But there will be pressure coming from the top [management] around managing liquidity for cash pension liabilities and other things, either to slow [investments] or even – if things were to get far worse – for there to be illiquid asset selling activity,” Kim noted.
“If you did see a lot of systemic stress on liquidity – which you don’t see at this moment – then there could come a point where LPs are forced to liquidate parts of their portfolio.”
Jaycee Man contributed to this article.