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How the crisis could affect fund T&Cs

GPs might seek to offer more attractive fund terms to incentivise LPs in the current climate. But what form might such incentives take, and are GP/LP relations likely to be affected more fundamentally in the longer term? Harriet Matthews reports

Exits in the European private equity market plummeted in Q2 2020, reflecting a reluctance from buyers and sellers alike to engage in such transactions in an uncertain market: 155 exits were completed, with an aggregate value of €8.45bn, according to Unquote Data. In Q2 2019, 274 exits totalling €50.2bn were recorded. The last time the market saw an aggregate value of exits of less than €10bn was in Q3 2009, when 202 deals were completed totalling €8.7m.

Amos Veith, a partner in law firm P+P Pöllath + Partners' funds advisory team, explains the difficulties that many LPs are facing against this backdrop. "We have seen some clients who are investing in PE funds and other investment programmes who hold hundreds of fund positions and base their liquidity plans and forecasts partially on returned capital: say they are holding 100 old funds in their harvesting period that are making distributions, and at the same time another 100 in their investment period, and they are using the money returned by the older funds to meet their capital commitments to the new ones. But they can see that there are no exits going on in the current market; buyers often want 30-40% purchase price reductions, whereas the seller can wait another year."

Karl Adam, a partner at placement agent Monument Group, notes that it is not just the M&A market that might be causing problems for LPs. "Some US university endowments, for example, are having issues as they are having to provide refunds for students and not getting course fees, so their programmes are taking a hit. And there are hospitals that are no longer doing elective surgeries and need money for Covid-19."

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