PE investors take tougher line with GPs amid Covid-19

Limited partners have cut back on private equity investments as they focus on monitoring their portfolios. And they are taking a more careful and rigorous approach to fund managers.
PE investors take tougher line with GPs amid Covid-19

Investors have been asking private equity fund managers tougher questions and are taking more time before committing to new opportunities in light of the the turmoil sparked by the Covid-19 outbreak. This environment has led to substantially lower levels of investing and dealmaking (see box below).

"The [manager selection] process per se may not appear stringent in response to the pandemic, but there are certainly more activities and more questions arising out of what we are experiencing right now," said Richard Tan, Hong Kong-based portfolio specialist at consultancy Mercer.

Richard Tan
Richard Tan

More stress testing will also be conducted around the ability of portfolio companies to operate in such an environment, Tan said. “I would imagine the viability of the investment thesis would be challenged now to make sure that it continues to hold going forward,” he added.

Certainly, investment committees are asking more questions about managers' credentials, a Hong Kong-based insurance investment executive told AsianInvestor. Investors in Hong Kong have become more astute as their exposure to private equity has increased over the years, he added.


Ultimately, limited partners in Asia are generally pausing new investments at least until the second half of the year, as they opt for re-upping with existing managers or allocating to "sexy opportunities" that are already in the pipeline, a Hong Kong-based placement agent executive said on condition of anonymity.

Yet investing in new opportunities or with managers who are not already on their books has also proved to be difficult due to the global lockdowns.

An executive from a sizeable Malaysian investor said the institution would not buy simply because an asset was cheap, despite opportunities to take advantage of reduced asset prices.

For many limited partners and their asset manager general partners, there's been greater focus in the past couple of months on monitoring existing holdings than on deploying more capital. Among other things, they need to ensure there is sufficient liquidity and covenant compliance at the portfolio company level.

Joana Scaff,
Neuberger Berman

US asset manager Neuberger Berman has created a team to focus on portfolio monitoring and management during the Covid-19 crisis, said Joana Scaff, head of European private equity, during a webinar hosted by Real Deals early last month. The firm invests as a limited partner in both PE funds and direct co-investments.

"We are in active dialogue ... with our lead sponsor partners, collecting data on the various investments and assessing the risk for operations and on the demand and capital structure," Scaff added. "And planning accordingly and proactively.”

This is perhaps not surprising, given that private equity asset prices look set to suffer in the next couple of quarters.

PE valuations have generally followed public market declines in previous market crises, with a time lag of about a quarter, said Scaff, citing historical analysis conducted recently by Neuberger Berman.

That said, the PE valuations only declined by about 50% to 55% of the comparable stock market falls and also tended to recover quicker, she added. 

It may be some way off, but there is at least light at the end of the tunnel.


Private equity investment and deal volumes in Asia fell in the first quarter of 2020 by several measures – and they are widely expected to drop further and likely not recover until next year.

Despite the large amounts of dry powder looking to invest, doing deals is more challenging in the current environment, particularly when it comes to early-stage assets and strategies.

Asia venture capital (VC) investment fell to a three-year low in the first quarter of this year, and further falls are anticipated, according to KPMG’s Q1 Venture Pulse report. The number of closed deals and value invested as of March 31 already suggests the totals for 2020 will be sharply down on last year (see graphs below).

(Click for full view)

This is reflected by estimates for the Indian PE market from EY. The consultancy expects PE (including VC) investments in India to be in the range of $19 billion to $26 billion in 2020, down 45% to 60% from $48 billion last year. And PE/VC exits will be 50% to 67% lower than in 2019, it added in a report published on April 20.

Meanwhile, global private equity secondary deal flow could potentially halve this year compared to 2019, by some estimates.

Some are somewhat optimistic, though. Bain & Company suggested last month that the decline in deal-making this time around might be less severe during the 2008 global financial crisis, when the number of deals in 2009 was half that in 2007. 

Look out for more articles coming up on how private market investors are adapting to the new environment under Covid-19.

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