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This article originally appeared in Private Equity International. For more LP Perspectives articles hand-picked for VCJ readers, click here.
Over 90 percent of LPs are prepared to conduct initial meetings with GPs virtually in the wake of the onset of covid-19, according to Private Equity International’s LP Perspectives 2021 Study. Meanwhile, two-thirds of investors will conduct fund due diligence on an entirely virtual basis and just over half – 52 percent – would be receptive to investing in fund managers having never met face to face. This marks a radical departure from traditional fundraising protocol, and while a narrow majority of LPs may theoretically be willing to take the leap, in reality their steps may be more tentative.
“After an initial freeze in March and April as people recalibrated, we have seen very little change or challenge and our programme has continued unaffected,” says Peter Linthwaite, head of private equity at Royal London Asset Management. “That said, targeted funds had already been identified and preliminary meetings held. I think a completely virtual due diligence process with a manager with whom there had been no previous contact would be a challenge.”
“A very small number of LPs are willing to invest with people that they have never met at all,” adds James Coleman, founder of Quest Fund Placement. “The majority are willing to invest with those where they have to complete the fundraising process virtually. Obviously, this dramatically works in favour of established groups or those that have built out significant LP relationships in recent years.”
Remote working has also changed the natural course of the fundraising journey. When international travel was the norm, investors may put aside half a day to meet all the right people and conduct onsite due diligence.
That meeting would prove critical, according to James Wardlaw, vice-chairman at Campbell Lutyens. “If that meeting went well, you would come out at least two-thirds convinced you were going to get their money,” he says. “That has now changed completely. Investors are no longer making that significant commitment of time and travel. If all it costs is a two-hour Zoom call, they have nothing to lose. What’s the next step? Is it another Zoom call? The sequencing has all changed and we need to establish what the new order of things will be.”
Finding the balance
The big question is: will the fundraising process revert entirely once meeting and travel restrictions are lifted? The general consensus is that some changes, at least, are here to stay. “A lot of LPs are increasingly comfortable with having initial interactions remotely,” says Gabrielle Joseph, head of due diligence and client development at Rede Partners. “And a lot of GPs have become very skilled at pitching remotely. They will continue to use those skills to avoid unnecessary travel in the early stages of fundraising.”
Joseph also believes annual meetings will remain at least hybrids, comprising both in-person formats and live stream. But she adds that a question mark remains over the critical conference season. “Conferences are an extremely efficient way for us to help our clients build LP relationships,” she says. “The question is whether people will feel safe attending large-scale events where delegates have travelled from all over the world.”
Certainly, LPs seem to have moved more quickly up the comfort curve than we might have expected at the onset of covid-19, according to Jennifer Choi, managing director of industry affairs at the Institutional Limited Partners Association. “While there are serious drawbacks to an all-virtual process, such as the inability to read the body language in the room during an onsite among a GP’s team, virtual diligence does allow more members of an LP’s team to take part in the process,” she adds. “Some LPs also note that eliminating the travel requirement has allowed them to meet with a greater volume of managers than during normal times.”
Other key findings related to the LP response to covid-19 include a lack of willingness to contemplate increased latitude when it comes to GP investment strategy. Only 36 percent of investors say they would be more flexible with their GPs when it comes to their investment mandate. “We have been very focused on identifying any strategy drift amongst GPs,” says Mikael Huldt, head of alternative investments at AFA Insurance.
LPs have nonetheless been keen to tap into sectors and strategies benefiting from covid-19, ranging from healthcare and technology, to special situations. But primarily, investors are contemplating the longer-term implications of the pandemic.
“The most simple and apparent lesson so far, as we see it, is that diversification is still extremely important to be able to withstand any black swan events such as this,” Huldt says.
“Therefore, I would guess that very niche and narrow strategies in certain sectors and geographies may have a harder time attracting capital going forward.”