Andrew Bentley, Partner at Campbell Lutyens outlines the evolution of LP and GP investment appetite over the last year.

From your conversations with clients, how has GP and LP appetite for investment evolved since the outbreak of the pandemic?

It feels like we have gone through a full cycle. In March/April there was a significant amount of LP concern about how Covid would impact portfolio values and also LPs’ own programmes. This was a direct result of the sharp drop in public market values which affected both the room for PE in their investment programmes and the changed outlook for businesses in their portfolios. It wasn’t until Q2 results were released in the summer that LPs were able to get a view on portfolio valuation effect.

Then, as the markets came back again in April/May and have continued to do so, concerns about whether to continue to invest in private equity funds have abated significantly. For GPs, there was an intense period of triage and remedial action within portfolios caused by completely changing trading outlooks. This has been particularly felt in the hospitality, retail and travel sectors, but there has also been an acceleration of technology adoption, which has created real upside for some GPs. There has been much talk about the “K” shaped results from Covid in the economy, where some companies have done well and some companies have suffered, but very few have stayed neutral. By Q2 results, it was clear which managers were more exposed to the downturn and which were exposed to growth and were beneficiaries.

This effect has translated into fundraisings where we have seen some GPs being more restrained about fund sizes and others taking the opportunity to accelerate plans. GPs are appreciating that good judgement on fund offerings including size is required in today’s market as raises are either going very fast or very slow and there is little in between.

Over this period, there has been a marked increase in appetite for growth investments and more tolerance for higher prices for growth investments. LPs have been more concerned over investing too quickly into troubled companies until we understand the outlook on recovery from Covid. Having said that, deal volumes look strong since the summer and a number of LPs exposed to tech sector are telling us they have been receiving very good distributions. So all in all it feels like we have gone full circle since March.

Campbell Lutyens’ LP Sentiment report indicates that in July/August the number of LPs putting commitments on hold fell to just 4% from 20% in March. What were their reasons for this and what are activity levels like now?

In March after the public market falls, investors were asking: “Do I have the flex or liquidity in my private equity allocation to make this new commitment?”. A lot of private equity investment teams weren’t sure or had been instructed to put their programme on hold early on. But, as public markets recovered, the concerns quickly disappeared and private equity activity resumed. Very few investors’ private equity commitments are still on hold.

What are LPs’ reasons for being hesitant about entering into new private equity relationships in this environment? What is preventing new relationships from being formed and new commitments entered into?

Currently the most difficult thing about fundraising is not being able to meet people face to face and this is particularly problematic for new managers and building new LP/GP relationships. Understanding each other and establishing mutual trust is just much more difficult over video. It can be done, but the bar of attractiveness required is higher than normal.

The other reason why new relationship forming is challenging is a longer term trend whereby the speed of return to market and the rate of increase in fund size of established groups has increased to such a degree that LPs find it difficult to make time and space for newer managers. Large managers now have more funds, subsector funds and different fund offerings and to some degree.

For new funds, the key is to prepare, prepare, prepare before coming to market, to make sure that the angle/ edge/ differentiating factor is very well honed, and track record is clear and evident rather than promised on some future event. It is all about preparation and positioning.

What opportunities are LPs most excited about in terms of private equity investment at present?

There are three key themes that LPs seem most attracted to at present. These are healthcare, tech and growth. We are hearing quite a bit about LPs shifting the proportion of their exposure to increase the growth component vs core buyouts. This particular shift has been driven by an appreciation of the role of technology as an accelerant for businesses and the maturity of the European market to accept large growth funds.

Growth is a subsector of private equity that has been performing very well in the US for a number of years. In the UK and Europe, there is less choice when it comes to growth funds, but many funds are turning to it, whether its venture capital managers raising later stage funds or large houses offering growth funds.

Other than this, there is also always room for outperforming specialty groups. Anything with a 3x or 4x on the record is something that LPs will get very excited about.

Looking forward, will future LP/GP relations change? If so, how?

 I think the fundamentals of LP/GP relationships are still personal and that will always be an important element. Looking forward, it will be more of the same but tuned up in a number of ways.

The intensiveness of the engagement between LPs and GPs in terms of access to information, visibility of the portfolio, engagement with co-investment, analysis of returns, has been growing for many years and will continue with more tech solutions and data platforms where information can be shared more easily. Therefore, the servicing of questions and insights, etc. will continue to grow