C-Suite's Key Role in Private Equity Amid Under-Target Closures
By
The private equity landscape is continually changing, presenting both opportunities and challenges to those navigating it. One recent trend is funds closing under target, a development that presents a new reality for general partners (GPs) and limited partners (LPs). This trend raises questions about the ability of GPs to efficiently deploy capital, the competitive edge of funds, and the level of communication from managers. However, the crucial role of the right C-suite employees in managing such situations can't be understated.
A critical aspect of this new scenario is frequent and clear communication with LPs. With suitable C-suite individuals in place, GPs can ensure open communication channels and properly managed expectations. C-suite executives, due to their expertise, can communicate complex financial situations in a way that builds understanding and trust. This is crucial as the continued support of LPs depends on their understanding of the fundraising process and the eventual use of their funds.
The perception of a fund closing below its target can be damaging, as it might be seen as a failure by some. This viewpoint views below-target closures as a negative outcome, especially when it takes over two years to reach that point. C-suite executives have a role to play here, fostering transparency, presenting factual data, and managing perceptions to mitigate the negative impact.
Conversely, some LPs welcome funds that are more conservative in size. They question the necessity of raising large funds and the capability to deploy such funds timely. They advocate for raising smaller funds more frequently, ensuring effective fund usage rather than deploying for the sake of meeting a limit. In these cases, C-suite executives can provide insights into fundraising strategy and help LPs understand this approach's advantages.
However, not all LPs share this view. Some believe a fund's shortfall being a failure depends on factors like market circumstances, the product type, the shortfall scale, and the fundraising duration. For these LPs, C-suite executives can provide context and perspective, explaining the various factors at play to help LPs make sense of the situation.
The perception of failure is also tied to the fund's performance compared to its predecessor. If a fund raises as much or more than its predecessor, it can be seen as a positive sign, even in a challenging fundraising period. C-suite executives can underscore the fund's strategy and deployment consistency, which can build investor trust.
However, if LPs express concern over a fund target and the manager remains overly optimistic, the fund will likely be perceived as a failure if it closes below target. This emphasizes the importance of transparency and realistic expectations, which C-suite executives are well-positioned to promote.
In addition to these challenges, GPs are also grappling with longer fundraising periods. LPs generally approve extensions because they want the funds they've committed to have sufficient capital. This situation calls for C-suite executives who can provide updates and manage the fundraising process effectively to ensure that the extended timeframe does not adversely affect the fund's performance.
The reduction in fund sizes has implications for LPs with exposure limits. If a fund is smaller, an LP's ticket might represent a larger proportion of the total. This can be managed by staging commitments across various closes. C-suite executives need to strategize and manage these commitments to ensure that LPs do not risk overexposure.
LPs who commit substantial capital to smaller funds need to carefully consider their investment. Overexposure to a particular fund can present certain risks. Therefore, it is crucial for C-suite executives to provide comprehensive risk assessments and to advise LPs on how to balance their portfolios.
Interestingly, some LP commitments are not sizeable enough to be at risk of overexposure. A managing partner at a financial firm argues that for smaller funds, the standard LP ticket size doesn't vary significantly.
References:
- Private Equity International. (2023). The changing private equity landscape.
- Investment committee perspectives. (2023). Perceptions of fund closures.
- Viewpoint on conservative fund sizes. (2023). Advocating for smaller funds.
- Avoiding overexposure in fund commitments. (2023). Managing LP exposure limits.
