First-time funds have not had an easy time in today’s hyper-competitive fundraising environment; the rapid spread of covid-19 will only make it harder.
This is especially true for first-time fund managers who have not had in-person meetings with limited partners. With travel restrictions and emergency border closures happening across the world in a bid to stop the spread of the pandemic, any initial contact between LPs and GPs will get pushed back.
“We are frankly saying to GPs which have yet to kick off initial roadshows, ‘Look, there’s no way of coming out right now,’” Julian Pearson, co-founder of placement firm FirstPoint Equity, told PDI‘s sister title Private Equity International. The system of in-person meetings has gradually shut down over the past 10 days or so.
FirstPoint was slated to hold an event in Dallas next week with more than 40 LPs due to attend for due diligence on EMR Capital Mining Fund III. That has now been converted to a livestream that will go in the data room. “That’s sort of the means of operating for the foreseeable future,” Pearson noted.
He added that while GPs and LPs have rapidly converted to video conferencing platforms in response to global health guidelines, the in-person chemistry is hard to beat. “A livestream or a Webex will never replace a first-time meeting. You simply don’t get that in-person chemistry check which is a vital part of cementing any partnership.”
Not all first-time funds are created equal
Few investors look to sponsor first-time funds. Nearly half of respondents in PEI’s LP Perspectives Survey 2020 said they only invest opportunistically in first-time funds, while 37 percent said they do not plan to back such funds in the future.
“Many LPs are focusing on larger, brand-name firms and/or just re-upping with existing GPs,” said Karl Adam, managing director at placement firm Monument Group. “Further, a difficult macro environment is typically not associated with successful first-time fundraises.”
Adam noted, however, that first-time funds are not off the table for LPs. Two attractive features are that these funds have no legacy portfolios to distract them, and they are often highly focused teams that are well aligned with LPs in terms of generating high returns and carry.
There could be an opportunity in this market environment for teams shifting from establishing a first-time fund to funding a pipeline on a deal-by-deal basis, according to Marc Wursdorfer, EMEA head of Private Funds Group at UBS.
That will require a strategy that is relevant in today’s market environment, Wursdorfer said, noting that a number of emerging managers are looking at take-privates and coming to UBS for funding solutions.
“How placement agents spend time with first-time funds will probably shift from raising blind pool capital to finding deal-by-deal opportunities executable in today’s market environment,” Wursdorfer said. “The highest on that deal list that makes sense in the short term are take-privates, distressed, special sits and credit opportunities.”
In fact, market participants agreed deal-by-deal fundraising will be commonplace for first-time funds before travel allows mainstream processes to resume.
The only potential silver lining from a fundraising point of view is that, with extended final close deadlines driven by LPs’ increasingly complex working environments, first-time managers will be able to use the additional time to advance their portfolios and close more investments in the fund, Pearson said.
He advises first-time fund managers to spend the coming weeks advancing the data room, upgrading fund materials and generally providing an enhanced level of detail for LPs.
While it is a fluid situation, GPs are bracing for a minimum of three to six months added to the final close date of any fundraise, whether for established or first-time funds, Pearson added.