Hope you had a strong week.
We had some interesting developments. First, we saw a pension system involved in discussions about tightening liquidity and the future of its private equity program reject a recommended commitment. This is something that almost never happens — once a fund has been vetted by pension investment staff and a system’s consultant — the pension board and investment committee generally move forward with the pledge to the fund.
This week, the Pennsylvania state workers pension’s investment committee did not move forward with a $50 million commitment to Sterling Group’s fifth fund, which is targeting $2 billion.
Committee members raised a few concerns, including diversity of the team. Even amid the pandemic, public systems are still focused on making sure the PE managers they back for 10 years or more are committed to growing diversity throughout their organizations. Read my story here.
More to the point, you just don’t often see a recommended commitment get derailed by a pension committee. I have seen a few instances of a recommended commitment get approved by a pension board pending review of legal terms not make it through that final review. That’s a function of an LP not able to get comfortable with the terms of a fund, which generally means the system has some issue with fees, governance or other details.
But right now, public pension officials are nervous and under intense public pressure, including from as high-profile a figure as Senate Majority Leader Mitch McConnell, who recommended states under financial distress file bankruptcy rather than seek relief from the federal government for underfunded pensions.
The value of their investment funds have fallen in the public market volatility, and while many say private equity is the best performing asset class, it’s also the toughest to maintain, requiring multi-million dollar commitments to 10-year relationships, high fees and capital calls at a time of tightened liquidity. So I wonder if we’ll see situations like this more often in this downturn; I recall a few recommended commitments get rejected back in the 2008 downturn as well.
As well …
We also saw the public questioning by a member of the investment committee of a practice that has gone on through the fundraising bull market. That is that firms will raise funds “early,” while they still have capital left to make new investments out of the prior pool, only to activate the new fund six months or a year down the line.
I’ve heard from LPs for years about the practice quietly grumbling about firms getting creative with deployment levels of the prior fund and coming back earlier than expected. Shelving new funds for some period of time is not otherwise onerous to LPs because capital is not called and no fees are charged on the commitments.
Committee member Joe Torsella questioned CVC Capital on this point for its new mega-fund, which is targeting 18 billion euros. Unlike with Sterling Group, Pennsylvania approved a 50 million euros recommended commitment to CVC Capital Partners VIII after the discussion.
Torsella asked how it was the firm was touting its ability to invest in opportunities created by the downturn if it wasn’t going to activate the fund until next year. (Torsella also said he believed the system should not be making any of the commitments right now with the financial situation so uncertain.)
I’ve heard a few good points on this — in terms of investing into the downturn opportunity, that will exist a year from now, if not in two or three years. Almost no GP is investing right now as buyers and sellers have no agreement on valuations. But in six months or a year, once the economy has at the very least found a bottom and the health situation is (hopefully) improving, the opportunity will be there.
Private equity funds are 10-year relationships with a period of five or six years to deploy capital (CVC has a six-year investment period), so raising now and activating in the first half of next year still represents taking advantage of the downturn opportunity.
The question then is, are LPs willing to make these big pledges at a time of tight liquidity. It’s a tough call — who wants to spend money or commit to spending money when the financial system is being held up by the government. But as we saw after the global financial crisis, these types of calls in general work out with money deployed into great investing environments.
What do you think? Will you believe we’ll continue to see push back on practices that were routine during the bull market fundraising years? Reach me at email@example.com.
On Blackstone’s first-quarter earnings call, CEO Steve Schwarzman talked about fundraising in the age of Zoom. Blackstone reported strong fundraising numbers in the first quarter, collecting about $27 billion, with $12 billion of that coming in March, just as the economy was shutting down as coronavirus spread across the country. The firm achieved this haul despite travel restrictions preventing firms from going on fundraising road shows and LPs performing on-site due diligence.
Schwarzman shared an anecdote about fundraising over video. The firm was supposed to have a large due diligence meeting for a fund with more than 130 to 150 attendees, which was done over a Zoom video call. “Everybody was pretty adjusted and cool with that,” Schwarzman said. Read more.
For a while now, LPs have been working to figure out exactly how much capital they owe extended out in subscription lines of credit. ILPA wants to try and make it easier to track that exposure, which is especially important now in the downturn with tight liquidity.
ILPA is preparing recommendations for GPs to regularly disclose certain aspects of their subscription credit facility usage with an eye to making it easier for LPs to measure exposure and manage liquidity, writes Graham Bippart on Private Funds CFO. The concern is a lack of transparency combined with reportedly lower LP distributions and bigger, more frequent capital calls could lead LPs to a liquidity crunch. Read more.
That’s it! Have a great weekend. Stay safe and healthy. Hit me up as always with tips n’ gossip, feedback or just to chat at firstname.lastname@example.org, on Twitter or find me on LinkedIn.