Last week we reported comments from a fund lawyer, who noted he had seen two instances of LPs defaulting on capital commitments as a result of the covid-19 crisis. We don’t know the identity of the limited partners in question, but it clearly captured subscribers’ attention: the article quickly became our most read piece of content since the crisis hit.

It goes without saying that the thought of investors not honouring capital commitments is alarming for GPs; at a time when portfolio companies may need decisive support and new opportunities could appear rapidly, they want to be able to act with certainty and haste.

And in a world in which subscription credit facilities are widespread (used by around 85 percent of general partners by our count) the idea of LP defaults is equally alarming for the providers of those facilities.

Defaults of this kind have always been very rare, even in the global financial crisis. Only one substantial example springs to mind; that was connected to the Abraaj Group, the firm whose mid-fundraise demise left investors unwilling to cover an investment already made from the fledgling fund. This was an aberration rather than a signifier of a larger malaise.

Fast forward to the present day: our conversations with market sources suggest that the two incidences referenced in our article are isolated cases. There is still little expectation of defaults among large established investors.

We do know, however, that the liquidity of institutional investors is top of mind for both the institutions themselves and their general partners.

A survey released earlier this week by consultant bfinance showed that liquidity risk was a greater concern for investors than downside, solvency or funding risk. Our own research – we surveyed 80 institutional investors with PE allocations – shows that one-in-five LPs is considering or intending to sell fund interests on the secondaries market to rebalance their portfolios.

Data shared by Colmore, a provider of LP portfolio monitoring services, show that in the last four weeks distributions have slowed dramatically just as capital calls are on the upswing. In terms of total value, Colmore clients saw 64 percent more capital called from US dollar funds and 14 percent more from euro-denominated funds than during ­­­the same period last year. Over the same timeframe, distributions have shrunk year on year by 72 percent for US dollar funds and 56 percent for euro funds.

One CFO tells us they have brought forward to April a capital call they were going to issue in the summer, just to be on the safe side. Alex Tarantino, commercial director for Colmore, says his firm has seen managers doing “precautionary” capital calls. “They want to have the capital on hand to help support portfolio companies with liquidity requirements should they need it,”­­­ he said.

This is the private fund equivalent of a shopper buying more toilet paper than they need. If everyone does it at the same time, then toilet paper – and liquidity – could be in short supply.

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