Crisis Sidetracks Fund Shops’ Equity Raises

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The coronavirus chaos is taking its toll on fund managers’ capital campaigns.

Operators across the country are postponing initial and final closes, or discuss­ing doing so, as investors focus on the dire outlook for their own investment port­folios. Among the shops pushing off dates are Encore Capital of Boca Raton, Fla., Newport Capital of Chicago, and TerraCap Management of Estero, Fla.

In addition, market pros say they expect few managers to roll out new offerings right now — with the exception of opportunistic vehicles looking to capitalize on the market dislocation.

One fund executive said investors are “in triage mode. They don’t want to know about the next fund someone’s going to launch. They want to hear about their exist­ing portfolios.”

To be sure, some managers haven’t delayed or canceled capital raises. But closings have slowed noticeably, placement agents said.

“We have seen closings in the back part of March,” said Alan Pardee, co-founder of Mercury Capital, a New York advisory firm. “Few and far between, but they have occurred.”

Doug Weill, co-founder of New York-based Hodes Weill & Associates, said managers and institutional investors are in fre­quent conversations about market conditions, asset valuations and potential future fund-raising opportunities.

“We are counseling clients to limit marketing in the near term,” Weill said. “It’s not productive to be pitching an offer­ing to a new institutional relationship at this moment in time, when most institutions are prioritizing assessing their current portfolios.”

David Frank, chief executive of New York placement agent Stonehaven, said the situation is worst for an operator that already had an initial close for a fund and began deploying it before the coronavirus crisis. An investor putting in new capital would effec­tively be buying into assets at pre-crisis values, he said.

“It’s like entering the S&P 500 but at January’s level,” Frank said. “Why would anyone do that right now?”

Frank said it could make the most sense for a manager to stop raising money for a such a vehicle, and instead launch a new fund with an opportunistic strategy targeting the current market dislocation. However, that means going back to the original vehicle’s committed investors and letting them know they will be the only ones in that fund — meaning they have larger-than-expected exposure to those assets.

“If you’re caught in that, it’s a wedge,” Frank said. “You bet­ter have very good [limited-partner] relationships.” He added managers may also turn

to offering individual deals to inves­tors to quickly raise capital for specific investments.

Pardee said that investors seem to have fallen into three camps. Many are continuing to schedule meetings, albeit via video-conferencing, and moving toward making commit­ments. Others are sitting out for a few months as they take stock of the initial damage to their portfolios. And a third group is still putting money out — but only to managers they already have longstanding relationships with.

“Some managers that are about to close are seeing inves­tors increase their allocation to a fund, as they want to have capital available for investment, particularly with a manager they know and trust,” said William Thompson, senior managing director in Evercore’s private-capital advisory group.

Managers that have already held an initial equity close also face a timing issue. After that first close, operators usually have a time-stamped deadline of 1-2 years to hold a final close. Given the current market pause, some managers could run out of time to raise more money, or have to ask their initial inves­tors for an extension.

“We’re fortunate in that the clock’s not ticking on us,” said one manager pushing off an initial close. He added investors won’t necessarily be willing to grant more time. “They aren’t always that nice. They think about their returns and what’s best for them. I’ve seen that in the past.”

Investors, meanwhile, are grappling with the “denomina­tor effect.” As the values of their securities portfolios decline, some institutions’ real estate holdings suddenly account for a larger percentage of their total assets. Take Ohio School Employ­ees. The pension system last week reported that due to falling values of other investments, its real-assets portfolio has hit its allocation cap of 17% of total assets, up from 14.7% at yearend.

Market pros say the denominator effect may prove to be tem­porary, however, since property values eventually will have to be written down to reflect the economic effects of the virus.

Another potential fear for managers is that institutions might fail to fund capital calls — although market pros say that’s unlikely to happen soon in more than a handful of cases. More likely, they say, fund shops and their backers would have conversations about waiting to draw down capital, to avoid such defaults.

Looking ahead, the market disruption could prompt limited partners to prioritize funding their biggest managers, partic­ularly ones raising capital for strategies that will look to take advantage of distressed assets.

“There was a haves and have-nots market before,” Mercury’s Pardee said. “Now the haves will have a little more and have-nots will have a little less.”

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