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Six Considerations for LPs Navigating Private Market Uncertainty

April 2020 - 6 min read

When it comes to finding clarity in an environment mired in uncertainty, an open dialogue between LPs and GPs is as critical as ever.

The effects of COVID-19 are being felt across nearly every sector and industry. While some companies are certainly feeling the effects more acutely than others, shelter-in-place orders across the globe have weighed heavily on businesses, causing revenues in many industries to slow significantly—and in some cases, all but come to a halt. These are unprecedented and extremely difficult conditions and they must be navigated carefully. For limited partners (LPs) trying to understand the potential impact of the pandemic on their respective private market portfolios, an open dialogue with their general partners (GPs) is key. Below, we outline six topics in particular that we think are worth addressing.
 

1. Prioritization of Multiple Competing Interests

GPs are facing a number of critical decisions in today’s challenging environment, and it is important for LPs to understand how those decisions are being made—or more specifically, how managers are allocating resources to support their portfolio companies. Time, attention and capital are in high demand, but a manager has to prioritize, as a capital injection for one company may mean a shortage for another. When considering how to allocate capital, there are numerous questions to consider. At the same time, capital decisions are being made when the depth and duration of the current economic disruption is difficult to predict. The same is true for GP deal partners’ time and energy. There simply are not enough hours in a day to appropriately triage each and every company to react to real-time, evolving situations. An hour spent with one portfolio company CEO or board is an hour not spent with another portfolio company that is experiencing the same unprecedented level of business disruption. Deciding what, ultimately, will have the highest economic value is far from cut-and-dry. But for LPs, it’s a worthwhile process to try and understand.
 

2. Balancing Portfolio Management with New Opportunities

Another consideration in this environment is how GPs are striking the balance between supporting their existing portfolio versus committing time and capital to new investments. Even with the challenges introduced by coronavirus that many businesses are facing today, there will be opportunities emerging to put new capital to work, often at very attractive prices. However, it can be challenging for GPs to allocate the time and resources to new investments, especially if they are working through issues in their established portfolios. In this respect, emerging managers may have somewhat of an advantage—without large legacy portfolios, they tend to have a greater ability to shift focus readily, and look for new opportunities to deploy capital at lower valuations. Understanding how GPs are striking this balance—and ensuring that there is a reasonable amount of time and attention being dedicated to making new commitments—may provide LPs with valuable insight into what to expect going forward.

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