Market Insights: Fundraising and fund financing amidst COVID-19

June 23, 2020

 

SVCA hosted on June 10th, a webinar to look at fundraising and fund financing trends amidst COVID-19. We brought Abrar Mir, Co-founder at Quadria Capital and Chris Loh, Managing Partner at Axiom Asia and Nik Rowold, Managing Director - Investor Relations, at CVC Capital to the discussion with international law firm, Ashurst, which was represented by three Partners, Nicola Hopkins in London and Danny Tan (Moderator) and Jean Woo in Singapore.

   Danny Tan:

The COVID-19 situation deteriorated globally in March and April - an unprecedented crisis that has left governments around the world scrambling with the uncertainties, learning as they go along. While many - businesses and GPs alike - have been fighting fires in the same period, many countries around the world e.g. US, China and Singapore have started to ease lockdowns.

Many Asian GPs feel that there will be good investment opportunities in the next 12 months and they want to be in a position to catch the wave. So even though there is still some degree of uncertainty with the Covid-19 situation over the next few months, these GPs are already making plans and keeping close contact with potential LPs.

Some LPs, especially the more institutional ones, have continued to invest in recent months and some, which have suspended discussions with GPs earlier, are returning to the table. I am cautiously optimistic that barring another sharp deterioration on the Covid-19 front, we should see fund-raising in this part of the world recover slowly in the next couple of quarters.

   Nik Rowold on CVC closing Asia fund in April at $4.5bn:

Timing sometimes is really important. The Asia fund closed at the hard cap in April, but the fundraising process probably started formally 18 months prior. For us, fundraising is an ongoing effort whether you are zero percent or 80 percent invested. Moreover, our Asia fund is a fifth fund, with the benefit of 20 year of track record and history, which gives CVC credibility and relationships.

In the current environment, you need that connectivity and credibility with an investor to say, “look, I know the world is tough out there, but we have a history of working together, and yes this is a very difficult period but we have been through crises before, together, and individually, we know there is light at the end of the tunnel.”

And yes, while it is difficult for GPs to try and raise capital right now, it is equally hard for investors to try and deploy capital; you’re sitting at home, you need to get through legal, due diligence, you need to coordinate everything remotely. It’s been remarkable for us to see how investors globally were able to work in very difficult circumstances, to move remarkably efficiently through a fundraising process and get done at the same level of quality of investments done as they have historically It really shows if there is a good partnership between the fund and the investor, a lot can be accomplished even in very difficult circumstances.

   Abrar Mir on Quadria closing Fund II in March:

We are a very small firm in contrast to CVC, and even though we are one of the largest PE fund focused on healthcare, comparatively, we are still a tiny piece of the private equity landscape.
For the likes of CVC, to get a meeting with any LP around the world, doors will open to hear their story. For us, and many emerging GPs, its a constant struggle to build credibility, not just to sell our story, but to sell the industry, region and our particular investment strategy.

I do think that fundraising is going to get increasingly difficult for smaller guys, and it doesn’t matter whether they are a first-time fund or a third time fund, a niche fund or a regional fund. There are a number of factors why that is: first of course that 2019 was a stellar year; 2020 at the beginning, we were seeing a slowdown even before COVID hit. And then it accelerated: due diligence, physical meetings, then the denominator effect for the large LPs that have been hit by the market correction in March, meaning a lot of them have an overallocation to PE that needs to be recalibrated. Then there’s cashflow. LPs are seeing a lot of capital calls but perhaps not the same level of cash returned from exits, that just adds to the pressure in fundraising.

   Chris Loh on Axiom Asia investing during COVID-19:

We have continued to invest in the past couple of months. We noticed a remarkable slowdown in the industry which is not surprising. We try our best to mitigate risk of investing. Most investors will say they are not comfortable to invest because they haven’t met the person face to face, whether they are investing in a business or a fund.

While face to face meetings are an important part of due diligence, you can raise quality bar. In the past, an investment may score 7 points to be investible. Today, the investment must score 9.5 and above to be investible.

Because we are not traveling now, we do more Zoom calls. And by getting different data points, we hope to compensate for what we can’t through face to face meeting.

   Nicola Hopkins on fundraising trends in Europe:

For fund raises where investors IC approvals had been obtained before the UK went into lockdown toward the end of March, those funds managed to successfully close.

Then came the slowdown, with investors taking a step back whilst waiting for more certainty, probing managers to understand business continuity plans and how they were dealing with their portfolios; reassessing their allocation (given the denominator effect).

Managers, on the other hand, were focused on ensuring there was sufficient cash - either through recycling or similar provisions or by drawing on their credit facilities even if not immediately needed - to inject into struggling portfolio companies, replace income that ceased to be provided by portfolio companies, meet fee and other obligations. As yet we have not seen evidence of increased LP defaults.

   Jean Woo On Fund Financing Amidst COVID-19:

What people are asking in this current market is whether there is an increase in LP default. The answer is generally ‘no’ as most of the deals are backed by strong institutional investors like sovereign wealth groups, rather than family offices.

Fund finance is a very useful tool to help fund managers bridge the timing needed to deploy funds into the market.
It is also attractive to regional banks because it is often backed by strong institutional investors. In the US/Europe, a number of funds utilise such facilities across whole fund life cycle.

There is a bifurcation between January, pre-COVID-19 when you see optimism for fund finance as Asia was lagging behind the US, and Europe and when COVID hit. From the general loan market perspective in Asia Pacific, there has been a 50 to 60% fall in deal flow in the last two months, an indicator of how much the market dropped. "The silver lining amidst this gloom is rebuilding the economy through green sustainable financing."