2020 was set to be another record year for private equity fundraising. Following a bullish 2019, with record levels of capital raised and funds coming back to the market at increasing speeds, a slowdown was not expected by private equity managers. The Covid-19 pandemic, however, has led to significant alterations to the fundraising process, investor appetite, and how new funds are approaching the market.

Real Deals’ recent webinar in association with Apex Group, looked at how private equity fundraising has been impacted by the Covid-19 pandemic and what fundraising will look like in the new normal.

On the panel:

Nigel Strachan, Head of PE Sales Europe at Apex Group Ltd

Warren Hibbert, Managing Partner at Asante Capital Group

Jason Glover, Partner at Simpson Thatcher & Bartlett LLP

Tom Patrick, Partner- General Counsel at Charterhouse Capital Partners LLP

Listen to the full recording here

COVID impact

Investor appetite for fundraising and deploying capital to new funds dipped in the first half of the year as a result of the Covid-19 outbreak. LPs exercised greater caution when diligencing new managers and committing to funds; doubting their ability to perform during this period.

Jason Glover, Managing Partner at Simpson, Thatcher & Bartlett said: “Lots of funds initially saw the environment as an opportunity to fundraise; that quickly changed when they realised that investors were perhaps more reticent to commit to funds than originally thought.”

Looking at investor behaviour during this period, the speakers concurred that size of LP and geographical location was a differentiating factor.

Glover said: “Investors who had sought to delay commitments tend to be the bigger investors. The rationale behind it is that they have the clout and relationships with managers so that they can afford to hold back and commit later...It’s typically been the bigger North American pension plans where we’ve seen that happening.”

“There’s also been a significant delay coming out of Asia,” Glover added. He explained that where the pandemic hit Asia much earlier than the rest of the world, investors have been late with their allocations.

In contrast, “a lot of state pension plans haven’t been able to change allocations as quickly,” as they had decided upon forthcoming commitments well before the pandemic hit, Warren Hibbert, Managing Partner at Asante Capital Group said.

While GPs have not completely pulled new funds from the market, firms have become more cautious about their fundraising targets and are “not wanting to be too ambitious,” Glover said. 

Existing relationships

To fundraise in the COVID environment, existing relationships have become even more important. Lockdowns across the globe have changed the way funds go to the market and new relationships have been harder to establish remotely.

For new or more established firms who have worked on a fundraise during this period, existing relationships with LPs and the assistance of placement agents have become crucial. “Those who had strong, existing relationships with their LPs still got funds away and were closing more regularly than they would usually do so,” Nigel Strachan, Head of PE Sales Europe at Apex Group said.

For those who need further assistance in building relationships during this period, the support of placement agents has been increasingly welcomed. “If you’re looking for new investors, you would need a placement agent due to current restrictions,” Charterhouse Capital Partner Tom Patrick highlighted.

In today’s environment, GPs will be working with placement agents who are able to extend their geographical reach, Patrick said. “One of the main features we would be looking for is in terms of geographical reach, possibly taking on placement agents on a geographical basis, due to travel limitations.”

The speakers also noted that while funds and commitments have been concluded completely remotely during this period, a prior relationship between managers and investors is key. “Today, we are seeing many investors completing DD and reviews without having to meet the manager through this process but they needed to have spent time with them beforehand,” Hibbert said.

Glover added: “Setting up of virtual due diligence is now important and to replicate the dynamic where people would meet with executives. As a result of the virtual circumstances, documentation and paperwork are important to enable people to be able to go out and do DD outside of physical meetings, and, the DD questionnaire becomes all the more important.”

The new normal

It’s clear that the fundraising landscape will not revert back to how it was prepandemic. The pandemic has led managers and their LPs to operate virtually and in-person meetings have been rare, if not non-existent. “As far as fundraising is concerned, the process hasn’t really changed in terms of getting stuff done, it’s how you get it done that has switched to a virtual medium,” Hibbert said.

Indeed, the new normal environment has brought significant efficiencies to the fundraising process. Managers, investors, and their placement agents have switched to operating virtually, and are proving that the process can still be successfully navigated.

Strachan said: “What was previously deemed to be not possible[fundraising remotely], is now possible. Lots of those initial meetings can now take place via a video call or data rooms... and we’ve seen closings during this period, so that is also possible.”

Patrick agreed that the new environment has brought improved communications between all involved in the fundraising process and new forms of communication and less travel means more can be achieved.

“The industry is long overdue electronic ways of closing, with the use of e-signatures and electronic subforms,” Glover added. Indeed, “The fundraising process can be done completely virtually and we’re in the process of seeing that, but it does have its challenges.”

Issues include engagement with investors, third parties such as regulators slowing the process and the challenge of closing completely virtually, he explained.

Nonetheless, investors, private equity funds, and their advisers have adapted incredibly quickly to maintain fundraising processes and time will tell how challenges will be overcome and which changes will be kept for good in the new normal.