PE fundraising during the pandemic – Q&A with Monument Group's Janet Brooks
Monument Group, one of the world’s most renowned placement agents, completed two high profile fund closures last week: Charlesbank Credit Opportunity Fund II closed at its hard cap of USD700 million, and Manila-based private equity firm Navegar‘s final close of Navegar II at USD197 million.
PEWire caught up with Janet Brooks (pictured), a partner in Monument Group’s London office, to talk about her experiences of raising funds during the pandemic.
How did you find Navegar’s fundraise? Have recent fundraises been more challenging than usual?
A lot depends where they were in the fundraising process when Covid struck. In Asia Covid started much earlier, so our Hong Kong office started working from home in January. The good news for Navegar [which is Philippines based] was that they were already quite far advanced in their fundraising at that time, having launched in 2019, and were doing trips throughout last year so the bulk of the money was already raised; we were just waiting for a couple of investors to come in to make the final close.
I think the Covid environment did slow that down, but most of the money was already raised. Charlesbank [which just closed its Charlesbank Credit Opportunities Fund II on which Monument Group served as placement agent] kicked off later in 2019 but similarly had already started to achieve traction and its strategy was particularly interesting to investors because of Covid so investors largely managed to carry on and get through their process reasonably unaffected. Other funds have had a harder time which I think will soon show in the fundraising data.
Would you advise firms who want to raise funds now to postpone?
Firstly, I think that LPs are still very supportive of private equity as an asset class and allocations remain high. There are two issues that could potentially affect appetite: the denominator effect, which seems to have faded quite quickly, and liquidity issues, but that doesn’t seem to have become a major factor. So overall LPs are in a good situation.
For those looking to fundraise now, there are two main challenges. First, there’s been a definite flight to quality among LPs, as investment committees raise their thresholds in a potentially volatile environment.
And secondly, the lack of in person meetings makes it difficult to attract new LPs. Investors are unlikely to commit to a manager they haven’t met in person or spent significant time with previously. [An in person meeting] doesn’t need to happen right now, but needs to have happened at some point in the past. Managers who are looking to come to market soon need to be aware that the market is challenging. The ones that are going to be successful are the blue chip franchises who have very deep relationships with investors because they are raising many different products in the market so investors know them really well; they will continue to do well.
And smaller groups that have clearly outperformed in some way, and can therefore create momentum really quickly, can also succeed. It will be tough for a lot of GPs however. Some are going to need to focus on their existing investors and close prospects. Others might delay until they can see a way to do in person meetings. Some might reign in their fund sizes as a result. All GPs need to spend time with their investors and prospects and connect early before in person meetings start again.
When you speak to LPs, are you sensing caution from investors regarding deploying capital into PE funds right now? If not, what types of funds are they looking at?
I don’t think there are many LPs that aren’t looking to deploy. There’s not been much of a reduction in the number of investors that are looking to deploy, but I do think that what they can deploy into is curtailed due to the reasons above; if they haven't met in person it will be very difficult for them to commit to a fund. They are basically looking for opportunities where they can either commit to brand name funds, or to groups they've identified as interesting and met with in the past.
We are still seeing a lot of appetite for funds. The last quarters of 2019 and the first quarter of this year were incredibly busy in terms of fundraising - the market was the busiest we've ever seen - so there are some investors that had already committed their entire 2020 allocation in funds in the first and second quarter. It's not that LPs don't want to invest, it's just that there have been so many good opportunities they've already committed to. That goes across a whole range of investors - pension funds, fund of funds, high net worths, and family offices.
Is there a difference in how different types of investors respond to the current crisis, or in terms of geography?
No, we don’t see a major difference between regions. At Monument Group, our teams in Asia, North America and Europe constantly compare notes, and I would say that the environments are remarkably similar. In Asia it might be slightly different because life has gone back to normal quicker due to the way Covid hit. But if you look at European and US institutions I don't see a huge difference in attitude.
In terms of differences by type of investor, initially, there were more concerns around pension funds due to the denominator effect which affected their allocation percentages but public market rises have reduced that issue. The group of institutions which remains affected are the US endowments of healthcare groups and educational establishments. They are both in a much more challenging financial situation as a result of Covid with reduced private procedures at hospitals and no fee paying students at colleges. coming in and thereby have their endowments been severely hit. This is more of a generalised problem though and not specific to private equity.
Does private equity have a competitive edge over other asset classes in moving through and out of this crisis?
The long-term attributes of private equity are well documented and that’s why we've seen people increasing allocations to the asset class in recent years. None of those general positives have diminished. In fact, if anything at this point there's an additional positive in terms of potentially reduced pricing.
The opportunity is still a very interesting one. Some LPs are looking at strategies which could capitalise on the economic situation caused by Covid. Some GPS have already raised ‘dislocation’ funds; and there might be more opportunities in turnarounds and distressed areas. So we may see some shift in strategies that LPs focus on in the short term, but overall private equity as an asset class remains very attractive.
What’s the most interesting aspect of your role at the moment?
We’re in a unique situation at the moment. PE fundraising has traditionally been seen as a laborious process; GPs, together with their Placement Agents – spend a lot of time on the road visiting individual LP offices globally having face-to-face meetings, often several times over in the fundraise process. Now you can't do that, so we're in uncharted territory. How do you build trust and conviction without in person meetings? So it’s interesting but also more challenging.
If Covid stays with us for the foreseeable future and it subsequently affects our way of working and meeting up permanently, do you think it’s time to rethink how deals are being made going forward? Or will PE always need the human component in dealmaking, in the form of an actual handshake?
It depends on the institution. There certainly will be some institutions that ultimately decide they can invest without a meeting provided they can reference enough around a particular manager with people that they do know well, possibly with other investors they are close to.
But for some LPs the in-person meeting is still sacrosanct. Entering into a ten year PE partnership is different from most other asset classes; you can't just cancel your commitment tomorrow. Perhaps at the margin we will see a shift toward shorter duration structures to give LPs more comfort when backing less well known managers? Of course the secondary market can give liquidity but no one wants to go into a new relationship thinking a secondary transaction will be the ultimate outcome.
How else has the private equity fundraising environment been affected by the pandemic?
In 2019 raising for a first time fund was challenging because the market was so busy. LPs had limited bandwidth to diligence new managers. Now investors do have time to look at new things because the fundraising pipeline for Q3 has reduced substantially. But the issue now is that LPs are unlikely to invest with people they haven't met before and if you are a first time manager, the likelihood of having met investors is obviously considerably lower. In terms of getting new groups into the industry – ones who often go on to create outstanding returns - that will be a problem.