Analysis

The Difficulties Of PE Fundraising In A Post COVID-19 World

By Benjamin Horney
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Law360 (April 24, 2020, 8:30 PM EDT) -- Private equity fundraising remained relatively strong through the first quarter, but even as some sponsors look to capitalize on potential investment opportunities in the aftermath of the COVID-19 outbreak, raising funds is becoming harder, and the difficulties are expected to be reflected in the figures for future quarters.

Through the first three months of 2020, there were 282 private equity funds with a collective $134 billion that held final closings, according to research firm Preqin. That's 87 fewer closings than in the first quarter of last year, but $14 billion more in total capital commitments. Going just by the statistics, it may not seem like the coronavirus has had an incredibly intense impact — but the effects of the pandemic will likely be more stark once the numbers come out for quarter two and beyond.


"If history is a guide, and recognizing that much of the Q1 fundraising was approved prior to the effects of the pandemic being apparent, fundraising is likely to be lower for the balance of the year, unless effective therapeutics and testing become available sooner than we expect," said Carl Roston, a partner at Akerman LLP and co-chair of the firm's corporate practice group.

Kimberly Smith, a partner at Katten Muchin Rosenman LLP and co-chair of the firm's global mergers and acquisitions and private equity practices, noted that "the true extent of COVID-19's impact on private equity fundraising may not be known for some time."

That being said, there are still 3,651 funds in the market right now seeking to raise a total of $874.4 billion, which is comparable to the same period last year, when there were 3,926 funds seeking just over $1 trillion combined, per Preqin. 

"As a general proposition, sponsors are cautiously moving forward with fundraises," said Shukie Grossman, a partner at Gibson Dunn & Crutcher LLP and co-chair of the firm's investment funds practice group.

Still, despite optimism from some PE players that they'll be able to continue raising funds with fervor, others are facing the facts, which include that some normal aspects of fundraising, like investor roadshows, can no longer take place.

And while many of the things needed to raise a PE fund can still happen — technological advances in the last decade have resulted in the ability to have video chat meetings and send legal documents back and forth easily via email — the coronavirus pandemic has also brought to a halt things like on-site due diligence visits, where potential investors come to a sponsor's office.

Those are usually an important component to convincing limited partners to invest in a fund, according to Deb Lussier, an asset management partner at Ropes & Gray LLP and co-leader of the firm's buyout and growth equity funds team.

"Those on-site diligence meetings are key to see how people interact at the organization with one other," she said. "You can tell by body language what the dynamic is between people when you're there in person. Some LPs have described it as a 'peek behind the curtain.' Obviously, those can't happen now."

Still, rather than not move ahead with a fund that's already in progress, people are finding workarounds, including video meetings.

"Investors may be willing to lose a bit of that in-person context for the sake of not missing out on investment opportunities," Lussier said.

Locking in investors with help from video meetings is a much easier task for established sponsors, however, according to Peter Laybourn, an asset management partner at Ropes & Gray and co-leader of the firm's buyout and growth equity funds team.

"Pivoting to the Zoom stuff works pretty well if you're a fund sponsor that has had a number of prior funds, so investors know you pretty well," he said. "For a brand new sponsor that you haven't sat across the table from before, there are more questions."

Indeed, in an environment in which it's generally more difficult to raise funds, the burden will be felt more by less experienced fund managers who haven't yet built up a track record that LPs can trust.  

"While those potential investors in the pipeline are continuing to slowly move forward in some cases, we are hearing that it is tough to get investors to initiate new conversations right now in the absence of an existing relationship, which will likely put more pressure on first-time funds," Smith said.

For all the bleak talk, it remains true that private equity players will be bullish on their future prospects, even if it means tweaking their usual approach. For instance, following the Great Recession of the late 2000s, private equity investors poured money into special situation funds and mezzanine funds as investors perceived a shift in what the most lucrative opportunities would look like, according to Smith.  

"We may see something similar now," she said.

Sarah Davidoff, asset management partner and client program co-head at Ropes & Gray, said that fund managers and investors agree that the current situation presents investment opportunities, especially when it comes to distressed deals or investments in companies within sectors like technology and health care.

"Sponsors and limited partners are on the same page regarding the fact that there are good investment opportunities," Davidoff said. "While we're all concerned about the general macroeconomic factors, those are sectors that folks would like to invest in."

Additionally, there are private equity investors who believe they failed to fully capitalize on the opportunities that existed after the 2008 global financial crisis, Davidoff said. 

"They feel they missed out after the global financial crisis and did not make investment at the pace they should have," she said. "They are using this market dislocation as a time to make investment opportunistically. We will still see many successful fundraises during this period, but it's also reasonably likely there will be challenges."

The coming months are certain to be filled with client questions about issues PE fund managers haven't previously faced, and not every fund in the market will reach its target on time. Some funds could fail to raise the capital they are seeking, while others will be forced to push back their timeline. In the long run, however, those who work in the private equity arena appear confident that the asset class will make it through this difficult era because of the industry's history of providing investors with strong returns.

"In comparison to the volatility of investing in the public markets, private equity funds generally seem to be a safer bet," Grossman said. "So in the long term, assuming we are in a quasi-recession as opposed to a full-blown depression, I do think we will continue to see meaningful capital-raising activity in the PE space."

--Editing by Philip Shea and Kelly Duncan.

For a reprint of this article, please contact reprints@law360.com.

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