The great LP liquidity debate: is the industry headed for mass defaults? Silver Lake heads for big fundraising haul, PE-backed cleaning companies prep for rampant build-out post-pandemic

Despite downturn, Silver Lake is expected to rack up at least $10 billion for its sixth fund and PE-backed cleaning companies are poised for pandemic expansion.

Morning!

Hope you’re moving swiftly and steadily through the week. I think it’s Thursday … but it could be Tuesday, or Memorial Day. Who knows anymore??

LP liquidity: How worried are you about limited partners’ ability to meet their commitment obligations to private equity funds? Among all the conversations I’ve been having during lock down, LP liquidity is something that frequently comes up.

Depending on the source, either the sky is falling or things aren’t so bad: either the industry should be ready for a wave of LPs defaulting on the capital call obligations, or most LPs are generally ok, under some liquidity pressure perhaps, as public markets fall, distributions dry up and GPs continue to call capital. But LP defaults will be rare. I believe what I hear from my LP sources on the frontlines.

And across the board, the LPs I’ve spoken to are not concerned about mass LP defaults smashing through the industry; perhaps defaults at the margins, say the small family office that overextended its exposure to PE and now needs an out. But nothing like the nightmare scenario.

Helping to mitigate some of these smaller defaults, I’ve talked to a few LPs who have let their GPs know they are ready to step in for any other LPs who need to sell out and take over their fund stakes. So even the individual challenging situations that may crop up in the downturn could be taken care of quickly and quietly with no hint of systemic repercussions.

“We’re happy to be a solution provider,” one LP told me recently. “There’s more capital on the secondary market and more folks that will be active on the LP side to buy more strategically. I don’t know if you’ll see a lot of formal defaults.” Read my full story here.

Pressure: Deal flow has dropped off almost to a standstill as buyers and sellers move further away on price expectations. Add-ons are still happening, as are deals that were agreed before the U.S. went into coronavirus lockdown. But new deals are essentially not happening and likely won’t be happening for a while.

So why are GPs calling capital? They’re drawing down to complete add-ons opportunities they’re finding out there for great value, and they’re funding capital calls that have been filled by credit facilities months ago, some at valuations that are a distant memory. Some GPs are paying down capital call credit lines early, to clear them out and give themselves flexibility for more deal flow going forward once the world starts to open up again.

Pressure on LPs comes from these capital calls that continue to roll in, while distributions from GP sales of investments are not materializing from a lack of exits. Capital calls have outpaced distributions for a few years now, and that gap will get much wider as the economy tries to recovery from the corona crunch.

LPs are putting money out for private equity, and seeing less come in, at a time of maximum volatility in the public holdings. For some this can lead to their private markets holdings representing too high of a percentage of the total fund, beyond policy caps.

If these LPs also have exposure to private credit, they are likely having to meet calls from opportunistic credit managers who are taking advantage of the downturn. Without ready cash, LPs under this kind of pressure may have to cash out of public stocks to meet private market calls at a loss, not a great position to be in. And they may have to sell to get their private markets holdings back inline with policy allocation levels. It’s not a great situation to be in right now.

“We’re going to see pockets of LPs who overextended themselves,” the LP said. “You’ll have groups who didn’t learn their lessons in the [global financial crisis]. The denominator effect is real for a lot of institutions.” But other institutions did learn from the GFC and built in cushions for more flexibility around allocation levels.

What are you seeing along these lines? Reach me at cwitkowsky@buyoutsinsider.com.

Top Scoops
Something a lot of people perhaps weren’t thinking too much about in the past: private equity firms with exposure to cleaning and sanitization are poised to expand through add-ons, additional factories and other growth strategies, writes Karishma Vanjani on PE Hub.

Going forward, joked Lee Helman, managing director at Financo, consumers will opt to maintain an inventory of sanitizer over underwear after the pandemic. Much sharper focus on sanitization, and consumer appetite, will force private equity to grow current portfolio companies to meet continued demand for cleaning products, solutions and services, Vanjani writes. Read it here on PE Hub.

Despite the downturn and expected slowdown of fundraising, Silver Lake is expected to collect at least $10 billion over the next two months for its sixth flagship fund, sources told Buyouts. A final target has not been set, but sources previously pegged Fund VI target at around $16 billion. Silver Lake’s ability to attract capital during the downturn highlights an expectation that brand-name private equity firms will still be able to raise in this environment as LPs stick with their most trusted managers. Read more.

That’s it! Have a great rest of your day. Hit me up as always with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com, on Twitter or find me on LinkedIn.