COVID-19 Fundraising Perspectives – The Path Forward


Eaton Partners Apr 2, 2020
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Subject: COVID-19 Fundraising Perspectives – The Path Forward

Eaton Partners expects that there will be a significant decrease in LP activity private capital fundraising as a result of the COVID19 crisis and the ensuing decline in the public markets over the coming months. This sentiment is based both on historical fundraising activity following similar public market declines as well as current conversations we have with institutional investors every day.

If the fallout from the Global Financial Crisis of 2008-2009 is any indicator of what may happen as a result of the COVID19 outbreak, fundraising will likely experience a precipitous drop over the next several quarters and remain depressed for some time. The recent public market moves will likely take a few months to have a real impact on allocations to alternatives but the impact will be significant. Therefore, it might be prudent to involve an advisor and advocate early in any fundraising process to ensure that you are best positioned to face the coming headwinds.

Footnotes

- S&P500 with sixth month lag (Bloomberg), a/o 25 Mar 2020

- Private capital fundraising (Preqin); *2020 – 2021 pro-forma based on last down turn (not historical)

 

Market Observations:

  • Private capital fundraising activity typically lags the public markets by two quarters as denominator effect impacts and updated fund valuations take hold.
  • The S&P peaked at ~1,550 in October 2007 and bottomed down 53% in February 2009 (sixteen months later). Private fundraising peaked in 1H2008 (six months after 2007 S&P peak) and fell ~56% the following year.
  • It took the S&P 500 ~5.5 years to get back to pre-GFC levels, while private capital fundraising did not get back to pre-GFC levels until 7 years after a pre-GFC peak.

What does this mean for GPs:

  • Overall Fundraising Amounts will Decrease: Though we remain hopeful that fundraising will not suffer as much as it did after the last crisis, the prudent assumption is the macro environment for fundraising will suffer significantly and fundraising levels could remain depressed for an extended period.
  • Overall Competition for LP Capital Commitments will Increase: With the proliferation of fund managers during the fundraising boom over the past ten years, more funds compete for significantly fewer dollars. Managers who have underperformed or not effectively articulated their capabilities will struggle to raise money.
  • Overall Competition for Re-ups from LPs will Increase: Many LPs will focus almost exclusively on re-ups, LPs will move back to high-grading their re-up relationships as the forgoing extending relationships with GPs, and where there is a re-up available, commitment levels may decrease, resulting in a need for GPs to fill the gap with new investors.
  • Successful Fundraising will Require an Experienced Advisor and Advocate: Having deep relationships, an honest third-party broker perspective, and an ability to have open conversations will be vital to fundraising success with LPs, which is what an experienced advisor such as Eaton Partners brings to a successful fundraising relationship.

Eaton has lived through and raised capital through several market downturns over our 37-year history. Coming out of the GFC, we chose to invest in our business and take market share, building ourselves into one of the largest global fund advisory and placement firms. We plan to take a similar approach now and have created capacity for some select new engagements for best-in-class managers who may want our help ensuring they position themselves optimally in a tough market and meet their fundraising needs.

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