The landscape for private fundraising in 2021 will be marked by a flight to quality and challenges for first-time funds, but a vibrant market could gain even more momentum once in-person meetings become possible again.
Fundraising will likely get a boost in 2021, but with limited partners looking for safety in top-quartile existing relationships and investor relations professionals unable to hold in-person meetings, the challenge for many will be landing new investors in an environment defined by short-term uncertainty. One option may be to focus on picking up old conversations with LPs focused on bringing in new life into their portfolios.
The big challenge in 2021 around the capacity to raise money from new investors will particularly impact first-time funds by definition. Even well-established GPs with consistent robust performance over the years, a solid existing LP base and a portfolio immune to consequences emanating from Covid may have to rely heavily on their existing investor base until in-person meetings can resume.
"If I’m doing my job right as the head of IR and fundraising and marketing, I will be friend raising all the time, marketing and introducing others to our fund, making sure we’re on their radar, making sure we’re developing relationships over time such that when it is time to actually fundraise, there are no new relationships," said Kimberly Kile, general partner at ABS Capital, which plans to launch a new fund in 2021. "The majority of our new relationships are relationships that have started to be developed during Covid. But there’s no guarantee that they’ll convert. It’s very easy to have a conversation and to be pleasant when there’s no ask on either side."
Fund managers with portfolios thriving under Covid conditions have received great attention from existing LPs, even if they have not historically outperformed the market or received the level of attention they are now receiving. LPs have not hesitated to increase their commitments to these GPs.
"There’s been a flight to quality in the fundraising market," said Eric Zoller, founder and partner at Sixpoint Partners. "For managers that have shown resilience or resistance to the impact of Covid, they have found it much easier raising capital. In fact, there’s overwhelming demand for their strategy."
However, if a portfolio has exposure to industries that have struggled during the pandemic, even if those specific companies haven’t seen a hit on revenue or have recovered by now, it will be that much more difficult to raise capital.
"There’s now an extra layer of conversation that you as an IR professional have to have with investors to talk about how you winterize your portfolio and how you restart your portfolio companies in a Covid-type of environment, even if there were no write offs, even if the companies performed," Zoller added.
Covid concerns or no, LPs have to commit to new managers to avoid static portfolios and leaving too much cash on the sidelines. They will either do so relying solely on virtual meetings or start meeting in person again, with different orgs and different investment officers taking a variety of approaches to risk management. Most IR heads are, quite rightly, not anticipating meeting LPs in person until Q3.
"Unless they are going to only continue with existing managers, LPs need to pivot and change their model a bit," said Kevin Kuryla, global head of private funds group at UBS Investment Bank. "In many instances, the limited partners may focus on people they spent a lot of time with previously. They got close on the last fund, met with all the partners the last time, and they are able to refresh and invest this time."
IR professionals will have to split their time between securing larger commitments from existing LPs and reviving conversations with new investors in the hope or drumming up fresh capital. But this is a delightful dilemma. With big wins out there for those who can successfully reignite past interest and plenty of reason to believe that existing LPs can be prevailed upon to write bigger checks, there's no wrong decision -- just different goals.
PERSON TO WATCH in 2021: Andrew Harris.... Director of Investor Relations at TA Associates. Harris joined the firm in November from Advent International only a few months before launching TA XIV, which is targeting $10.5 billion. TA XIII closed in 2019 on $8.5 billion and was oversubscribed. The big question is whether TA will rely solely on existing investors writing larger checks or whether it will land new LPs amid the continued pandemic.