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Coronavirus crisis puts GP-led options on the table – survey

One in 10 general partners plan to seek secondaries processes due to the covid-19 pandemic, a survey by sister publication PEI has found.

The novel coronavirus pandemic is making some general partners consider secondaries transactions on their funds, research from sister publication Private Equity International has found.

See all Secondaries Investor’s coverage of covid-19 and its impact.

Asked whether they expect to seek a secondaries process to give their portfolios more time to create value, 11 percent of GPs replied “yes” while 33 percent said they were undecided. Just over half said they would not.

The survey comprised responses from 120 fund managers who have raised a private equity fund in excess of $100 million over the past five years, as well as 80 institutional investors with allocations to private equity. Fieldwork was carried out in March.

Private equity firms including Blackstone and KKR have warned in recent weeks that the covid-19 crisis will make it difficult for them to realise value in their portfolios. In a regulatory filing on Tuesday, KKR said many of its investments will be reduced in value from their 31 December marks.

“If the impact of covid-19 continues, we and our funds may have more limited opportunities to successfully exit existing investments, due to, among other reasons, lower valuations, decreased revenues and earnings, lack of potential buyers with financial resources to pursue an acquisition, or limited or no ability to conduct initial public offerings in equity capital markets”, the buyout giant warned. This would result in a reduced ability to realise value from such investments, it added.

The survey also found that a small proportion of GPs who are investing their funds plan to seek extensions to their commitment periods and fund terms, at 14 percent and 10 percent respectively.

Last month, law firm Paul, Weiss, Rifkind, Wharton & Garrison noted that the market dislocation caused by the coronavirus pandemic could lead to unique opportunities for GP-led processes. Individual portfolio companies that need more time than expected to maximise value and distribute proceeds may need an injection of capital.

“Accordingly, GPs should be prepared for an uptick in secondary activity, including as a result of investors’ defaults,” the firm wrote.

Falling values in public markets could lead to some limited partners selling fund stakes on the secondaries market, PEI‘s survey found. One-fifth of LPs said they will either be more active or would consider being more active sellers in direct response to the denominator effect.

Most LPs receive reports at the end of every quarter, and private equity results are often lagged six months, David Fann, president and chief executive at consultant TorreyCove Capital Partners, told PEI in March.

“There’s a big delay that’s going to occur between private equity marks and public equity markets that will create a denominator effect,” Fann said. “Unless there’s a significant recovery in the public markets, there will be a denominator effect and it may cause some public pensions to have to re-adjust their thinking.”