ILPA Summit: Market Updates and Emerging Trends Around Fundraising and the GP/LP Relationship

The 16th Annual Institutional Limited Partners Association (ILPA) Summit -- the association’s first virtual summit -- held November 10-12, featured discussion of key market updates and emerging trends centered around fundraising and the general partner (GP) and limited partner (LP) relationship.   

Market Update

Kevin Kuryla, Global Head of the Private Funds Group for UBS, led the discussion on the fundraising market and specific impact of the pandemic, noting the following key points:

• The private equity market continues to be robust.
  • Even with the pause early in the year due to COVID-19, there has been assets under management (AUM) growth and dry powder growth that exceeds 2019 levels.
  • All asset classes have grown except for real estate.
• While fundraising remains high, the number of funds has declined.
  • The dollar volume has been strong but the number of funds has declined materially.
  • For a significant part of 2020, due to the perceived risk of investing with someone new, LPs have focused on established managers, seeking to invest with those they have invested in the past or ones that they have met in person.
  • This has led to a situation where larger funds have attracted significant capital as opposed to emerging managers.
• Looking forward, LPs are proactively having conversations about how to properly perform due diligence for new managers.
  • In a recent survey, 20% of the market noted there was zero comfort investing in new managers without meeting in person, 50% of the market is selectively adding new managers, and 30% of the market is proactively looking to add new relationships. Those looking to add new relationships has increased from 10% to 30% over a four-month period.
• While it is unknown when we will return to “normal,” it is unlikely that remote diligence will take the place of in-person funding.
  • LPs still want to be in the room and see the interaction between the GPs, founding partners and next generation of leaders.
• Geographically, North American funds continue to dominate the capital raise, anticipated to end the year roughly in line with 2019.
  • Capital raised by European funds has seen the largest uptick, with a number of large closes that have moved the needle.
  • Asian funds saw a significant decrease, but this was also a result of timing as there were some significant GPs that entered the market in 2019.
• Emerging trends --
  • GP-led secondaries have seen dramatic growth including:
    • Preferred equity – unsecured and nondilutive hybrid capital;
    • Continuation funds – assets from an existing fund rolled into a new vehicle;
    • Single Asset Funds – newly structured special purpose vehicles (SPVs) focusing on one existing investment;
    • Stapled Primary – Replace existing LPs with new investors that will commit primary capital.
  • The SPAC IPO market continues to grow and mature with consecutive years of record-breaking issuance from 2017 to present.

Mr. Kuryla  went on to advise GPs of key areas of focus for LPs given the events of this year.  Market volatility has led LPs to evaluate pre-COVID-19 portfolios and how those portfolios are performing in the onset and continuation of COVID-19. Their diligence is driven by the following questions, mainly connected with the GP’s operational capabilities:

• Are there adequate portfolio insights, key performance indicators (KPIs) and dashboards that have been put in place to allow LPs to get real-time perspective on the performance of the portfolio?
• Does the GP have the knowledge and bandwidth to manage the portfolio in this type of environment?
• How does the GP continuously assess the business and assist with recovery and rebound?
• How does the GP create value in their portfolio companies?
• Has the GP been able to find value in dislocation and take advantage of the available sourcing and execution opportunities?
• What does the GP’s upcoming pipeline look like?
• Now that there has been some recovery, will the GPs divert all of their resources towards the future pipeline or will they systematically keep in place things they were doing to protect and grow the current portfolio?

While it has been a challenging year, Mr. Kuryla believes that as an industry there is some optimism to take away.  There has been increased partnership and creativity, and more robust conversations between GP and LP groups.  The industry has earned high marks during a period of extreme duress, with significant opportunity going forward.