First time funds in down market
WSO folks (but especially LP / asset management monkeys):
I work at a first-time PE fund that’s currently in the market raising Fund I. We have closed on some money but are still below break-even (ie management fees covering personnel) and well short of final close target. Given the market situation, and many LP’s aversion to first time funds during any climate, how significant is the risk that we can’t close on much more money? Should I be eyeing the exits?
You need a backup plan, and you need it yesterday.
Agree with this. Whats happening is that many LPs (including FoFs) are have to rebalance their portfolios to liquid investments so even if they want to they don't have the money to invest, and ofc it makes much more sense to not invest in a new fund than to not invest in a fund with existing relationships.
To give to a more concrete example, lets say an LP with $100 has a strategic asset allocation of 20% illiquid (VC and PE) and 50% liquid (public equities and debt) so $50 to liquid and $20 to illiquid. Since the markets are down, that $50 turns into $30 (down 40%) so the overall portfolio is worth $80 ($20 VC/PE, $30 liqiuid, $30 in other asset classes) and liquid is only 37.5% of the portfolio (not 50% as described in strategic asset allocation)
Temporary swings in allocations are normal, but since this is such a large drawdown with no certainty, the LPs have to buy $10 of liquid to bring it up to $40 (which is 50% of the portfolio.)
Hope this helps.
Thanks -- do you have a sense of how often LPs go through this rebalancing exercise? Or is it something that's maybe always in the back of their mind?
Idk too much about this part, but I belive it depends on the LP. Most LPs have a SAA set and have set intervals when they rebalance and also for when they recalculate (based on risk return changes.) There will also be internal policies for a margin where rebalancing is not needed. In this example, the limit could be set to $45, meaning if equities are >=$45, no need to rebalance.
Another point I should add is that within the $20, many LPs bucket it furthur for first time and seasoned managers. E.g. $15 for existing and $5 for new managers. The $5 is akin in R&D expense (in this case to identify new talent.) So just like in a recession new customer acquition and R&D is the first one to go, in this case that $5 sub-bucket is usually the first to go.
But again, I am not 100% so fellow monkeys should pitch in.
This is true but some LPs with dedicated PE-only teams will not care about what happens to the public side of the portfolio. So it will be business as usual for those that are not at pensions funds / SWFs who are using this WFH situation as a chance to relax and have a sun tan (speaking from recent experience...)
Couple of questions for more context -
Will PM you, as there's only so many new funds in the market and I would prefer to maintain a degree of anonymity
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