First Time Fundraise – What to Expect in a COVID -19 World

June 10th, 2020

Opus Connect’s June 10th,  2020 webinar focused on the challenges that first-time fundraisers of private equity can expect to face as the world continues to grapple with the Covid-19 pandemic. Moderated by Tom Kesoglou (Ice Miller), panelists included Ami Samuels, (Gatewood Capital Partners), Marc der Kinderen (747 Capital), and Stephan Connelly (Star Mountain Capital). Topics discussed include: 

  • LP investors’ attraction to first time funds (as first time funds tend to outperform follow on funds)
  • The extensive due diligence process conducted by institutional LPs
  • The advantage GPs can give themselves in preparing for the due diligence process 
  • Fundraising during COVID-19

Tom kicked off the call by checking in with the panelists on what has changed for them in the past few months, as businesses adjust to a new normal of lockdown and work-from-home. The general consensus was that nothing monumental had changed, as due diligence is still being rigorously conducted. Stephan in particular noted that smaller first-time funds are still on track to outperform larger legacy funds. Key takeaways on the state of due diligence include: 

  • Private Equity firms continue to look to finance new companies and are seeking out independent sponsors to commit funds
  • A secondary goal is to get as creative as possible with managers by taking a legacy LP to a new commitment 
  • A general positive outcome is the success of non-face-to-face interactions and the ability to get the entire team onto a Zoom call to evaluate new investments, whereas before many would be traveling and unable to make introductory and follow-up meetings
  • New investments with emerging managers remain easier and more attractive than with legacy GPs

When Tom queried the group as to whether or not they’d allocate funds and commit to a manager without an in-person meeting, the panel remained hesitant. Ami and Marc affirmed that in-person meetings cannot truly be replaced – due diligence can be done remotely, but there needs to be an in-person evaluation before committing to a deal. 

Topics that require more attention in a post-Covid world while performing due diligence include: 

  • Timing of the deal, Q1 numbers (particularly January and February 2020), overall EBITDA, and customer sentiment all give M&A professionals extra data to sift through (Stephan)
  • Capital that may by sitting on the sidelines have potential for a greater flow in September (Marc) 
  • Deal closings will likely be later, like we saw in 2008 and 2009 after the global financial crisis, which is positive in that GPs can then be effective in maintaining these relationships for many years and provide funds with momentum (Marc)
  • Predicted longer fundraising periods and extensions given will be a benefit to first-time funds (Ami)

New strategies going forward anticipate having to deal with companies that are in distress, dealing with debt, filing for bankruptcy, and the potential for having to restructure following Covid-19 as assets are liquidated or shed. In particular, Marc noted that managers with a proven capability to perform in a repeatable way within their specialty are the ones to watch, with Stephan agreeing to the importance of managers evolving to face the challenges Covid-19 poses. The most attractive funds right now, according to Ami, are ones that have actionable deals ready to go upon close, with references and transactions to back them up.

A few closing takeaways from the panel as Tom inquired how the deal pipeline looks right now: 

  • Deals are significantly slower but still proceeding, will nearly all due diligence done remotely (Marc)
  • Good managers will get traction, but expect everything you were planning to stretch into longer periods of 12-18 months (Ami)
  • Second- and third-time managers are struggling, but it will be a badge of honor to have raised capital and closed a deal during a pandemic (Stephan)

Thank you to all our participants for their guidance and expertise as GPs and LPs adjust to a new set of business rules post-Covid-19. We’d also like to thank our sponsors for this event: Ice Miller, NFP, Sterling National Bank, 4Degrees, Focus Search Partners, and Resourcive.