Coronavirus pandemic spurs requests to alter private equity investment terms

The pace of such requests has increased since the coronavirus crisis took hold of the US economy several weeks ago, as general partners seek to enhance or preserve liquidity at their portfolio companies, according to several investors and their advisers.

For instance, general partners have drawn down subscription lines – which involves borrowing against limited partner commitments – and other credit facilities, cut operational costs, and strengthened balance sheets of their portfolio companies.

“Amendments to LPAs is yet another lever for private equity firms,” said Irwin Loud, chief investment officer and managing director at Muller & Monroe Asset Management, a private equity investor in lower mid-market companies.

The largest number of general partner requests appears to be for an extension of the investment period for funds that have already been raised, some of the people said.

The volume of transactions has slowed, there is uncertainty about exits from investments and fund general partners don’t want to be forced to sell while asset prices are depressed, according to John Haggerty, managing principal and director of private market investments at consulting firm Meketa Investment Group.

“LPs will be probably quite accommodating on the fund term extension provision,” Haggerty said. Extensions of the investing period became more common in the years just after the financial crisis that brought down Lehman Brothers Holdings in 2008, with some limited partners seeking fee concessions in return for accepting the change.

But accommodating extension requests concerning fundraising periods for funds that have held a first close yet remain in the market for new commitments could be more challenging for limited partners, Haggerty said.

In some cases, general partners have expressed a preference for focusing on shoring up recently acquired businesses rather than trying to find more capital commitments, people familiar with the matter said. Often, LPAs specify a limited time period for a general partner before it must hold a final closing and cut off new commitments, these people said.

Extending that time period poses the risk that the fund will be overly concentrated in existing investments for a prolonged period.
“It raises the concentration risk for LPs,” Haggerty said of complying with such requests.

Extending fundraising times also means final investment realisations could take longer to materialise and management fees charged to limited partners could be more than anticipated over the life of the commitment, cutting into returns.

But investors do accommodate amendment requests from general partners.

One institutional investor with more than $3bn in private equity assets has acceded to requests to increase single fund concentration limits to let the general partner inject more capital into certain companies, according to an executive with the investor. The investor also has accepted changes in an LPA so that the manager could use fund capital to invest in distressed credit of portfolio companies.

“I suspect we are hearing from the more thoughtful and proactive GPs first and that the quality and reasonableness of future requests will deteriorate or become more questionable as time passes,” the investor said.

Amendments also are being sought to invest opportunistically in new strategies such as distressed debt, making minority investments and buying publicly traded securities, people familiar with the matter said.

Before agreeing to such amendments, limited partners are reviewing a fund sponsor’s investment strategy and how it aligns with the manager’s operating and investment capabilities and sector focus, said Eric Zoller, founder and partner at fund placement firm Sixpoint Partners.

In the current environment, making private investments in public entities can be a sensible strategy, according to Andy Eversbusch, a managing director and global co-leader of the private equity practice at consulting firm AlixPartners.

“I think there is going to be more of public to private transactions,” Eversbusch said. “Tiers of suppliers in the industrial sector are going to be hurt by the coronavirus and could very much benefit from private capital in order to stabilise their businesses and weather the storm.”