60 Seconds with Sixpoint: Are You Worried About Your Fundraise? How To Navigate Through The COVID-19 Impact

While the COVID-19 pandemic continues to evolve, all of us here at Sixpoint Partners hope that you and your community remain safe and healthy.

While the public market response to COVID-19 has been visible and volatile, the private equity market’s has been less immediately apparent. Understanding the impact on private equity and, more specifically, private equity fundraising will take time. In this issue, we’ll discuss the current impact on GP fundraising plans and also outline steps you can proactively take with your investor base to demonstrate how you are addressing the virus with your portfolio and team.

In the previous 60 Seconds, I talked about how the mini-onsite acts as a bridge between a traditional onsite and the decision to commit to a close. Market sentiment has changed so drastically in the last few weeks that we’ve gone from multiple onsites to mini onsites to none in person at all. The slew of meeting cancellations has left most GPs feeling uncertain and or anxious. The level of each likely depends on the stage at which you may be in your fundraise. Anyone looking to launch their fund during Q1 and possibly Q2 should reassess their marketing strategy. LPs are currently triaging their portfolios, focusing on re-ups (with enhanced scrutiny) or force-ranking only those new managers that are truly at the final closing stage and which they feel they must take a run at. The lack of available mindshare for new commitments in the immediate term will abate, but for now, it’s best to find alternative means of staying relevant in the market than blithely asking for meetings or introductory calls (more on this below). We have long advocated for a strong investor relations program to protect against unknown risks in the market, and the impact of COVID-19 is just one example. Now is a great time to communicate.

Understandably, many LPs have prohibited outside visitors, not allowing even the most desired of GPs to enter. Fortunately, we live in an era where video technology can help circumvent these travel bans, but may not yield the same level of results as the traditional face-to-face gathering. On the GP side, we are witnessing some managers take an affirmative step in easing investor concern or maintaining engagement by distributing a memo to their underlying LPs. These letters focus on the potential effects of COVID-19 in three ways. First, successful managers explain how they are dealing with the virus in regards to their own employees at the fund level. This takes the form of coordinating work from home initiatives, staggering employee arrival times, and mirroring the guidance published by the Center for Disease Control (CDC).

Secondly, we’ve seen GPs articulate how they plan to manage the Coronavirus with respect to employees at the portfolio level. The most compelling strategy we’ve seen is by managers that have identified leaders within their portfolio companies, essentially delegating the responsibility for coordinating the COVID-19 response. These “Corona Czars” effectively are accountable for enforcing corporate policies such as employee self-quarantine after returning from a highly effected region or banning all inessential travel until further notice. This not only ensures the process is taken care of but deepens the relationship with your portfolio leadership teams.

Lastly, managers should articulate risk management plans surrounding portfolio operations and commercial continuity. These actions can project confidence to investors by establishing a mindset of resiliency. Examples include implementing periodic reporting period for assets experiencing supply chain distribution, running simulations of potential recessions or bracing for sudden decreases in expected orders. This is a great way to communicate on a more real-time basis to LPs what impact the virus may have on business performance and how that ultimately will flow through to financial performance. We have begun to develop customized materials for our clients to begin sharing with their LPs and would be happy to discuss the same with you.

For those of you knee-deep in your fundraise or eyeing a final close, you should likewise expect some minor delays. March 31 or June 30 closings will certainly need to be extended and create a backlog at the end of the year for anyone new launching. Some LPs have placed a 60-day moratorium on new commitments, while others want to use that time to collect more inputs about the virus’ impact on your portfolio. Still, others simply can’t take the time to complete their work. This is the trickiest dilemma to solve of them all. Although some LPs have agreed to convert onsites to calls, at Sixpoint we are cautioning GPs about the pro’s and con’s of a full-blown digital roadshow vs. waiting for an in-person meeting. First or follow-up meetings held via video may seem like a convenient option; however, the effectiveness of these interactions is questionable. Carefully consider and assess each meeting, the status and quality of the relationship as well, as agenda before pushing to hold a call simply to “move things along”.

Distributing a communication memorandum to your LPs helps demonstrate that companies under your control operate as an extension of your philosophy as a firm in terms of risk and crisis management. Pushing for calls and meetings at this time may be insensitive if not inefficient. Where a call or meeting is held, 60% of the focus will be on the impact of COVID-19, not your strategy or philosophy, so be prepared to have detailed answers on how each company is doing. Too many GPs under-communicate rather than over-communicate with their LPs during global turmoil. Sometimes they miscommunicate. In summary, be thoughtful. Seek advice. Be patient. Don’t let the market dictate your decisions, but don’t behave as if it’s business as usual either.

Sixpoint Partners is a leading global advisory firm focused on a diversified set of services and solutions for the middle-market private equity industry.  The firm’s core area of focus include (i) primary fund placement, (ii) secondaries advisory, and (iii) co-investment placement cross a wide range of industries, strategies, and geographies.  Sixpoint is headquartered in New York with offices in Chicago, San Francisco, Austin and London.