Fundraising during Covid-19 — a glass three-quarters full perspective

“Covid-19. Is there any point trying to fundraise?” is by far the most common question I got asked in the last few weeks by companies and fund managers.

The short answer is: Yes. Yes, there is a point to going out to fundraise if you are truly ready and you have a great, recession-resilient business model. Investors have not just shut shop and spent time perfecting their putting game in their back gardens — at least, most haven’t done that. In fact, what I am hearing from investors, both GPs and LPs, is that they are busier than ever.

Granted, part of that is about extinguishing fires in existing portfolios, but those investors who have undeployed capital are keeping an eye on interesting opportunities coming through the crisis, true to the old Chinese saying (of course, totally mis-translated) of how crisis is danger but also opportunity. I personally prefer any number of Warren Buffet quotes — not least because they are (I hope) more accurately attributable.

“A climate of fear is [an investor’s] best friend. Those who invest only when commentators are upbeat, end up paying a heavy price for meaningless reassurance.”

My advice is slightly different for companies raising a round and for funds (GPs) raising from institutional LPs. Heroically, I’m attempting to cover both angles in this article as I feel the fundamentals play out similarly in both cases. First, I’ll address funds, so if you’re a company seeking to raise, skip down to the company part of the article.

Raising for a PE or VC fund in the current situation

The LP perspective: No one really knows the full impact of Covid-19 on GP portfolios, not even GPs (let’s be honest). While the majority of GPs are suggesting a Q3 2020 rebound, it’s actually really hard to tell. Nobody even knows when lockdown rules globally will be completely relaxed — not even the governments, so what chance do GPs have?

Therefore, LPs are taking GP estimates with a fistful of salt. What does that mean? On average, secondaries and coinvestments are difficult to execute at a time like this. With secondaries, LPs don’t want to take the risk of two consecutive quarters of mark-downs, which as we all know, from an IRR standpoint, is extremely difficult to recover from. Coinvestments — the businesses have to be really, really good, and provably recession-resilient.

Primaries? At least existing relationships have a decent shot, and others may too, if the strategy is appropriate for the cycle. According to a Preqin report, 267 private equity and venture funds closed with a combined $133 billion of value in Q1 2020. In value terms, this is a 12% increase on the same time last year. As an optimist, I think (unless you are Masayoshi Son) the $133bn should be enough for your targeted fundraise. For good propositions, investment dollars are still available.

Why is this? LPs recognise that primary investments mean that drawdowns happen over a 5-year period, and therefore, a lot of the capital is likely to be invested into a gradually rebounding market, which is a good thing.

As the data in the chart below shows, the two poorest performing private equity and venture capital vintages in the last 20 years were 2006 and 1999 ie one or two years before the respective crashes. On the contrary, look at what happens in 2000, 2001 and 2008 — the years of the downturns — private equity returns of those vintages turn into local maxima. Logic dictates that 2020 is probably a good vintage for primary capital deployment. And I believe that LPs in 2020 are smarter about that fact than they were in 2000 or 2008. As a GP, if you believe that you have a good strategy and track record, and your marketing materials are ready, get out there and pitch.

Source: Underlying data from BVCA Performance Measurement Survey Summary 2019, based on BVCA membership data; Analysis: TK-Advisory

My advice: If you are not fully ready, take the time to re-evaluate your investment product proposition, and update your marketing materials.

GPs often get very caught up day-to-day in running their business, in sourcing deals, in financing them or refinancing them, in diligence, planning and executing exits, in keeping LPs updated, in keeping the team happy, in…. the list goes on. But there’s seldom a chance to take a breath, especially if you are a small or medium size group, to strategise, to consider your product suite, or to consider whether your marketing messaging is on point.

While leadership teams and Investor Relations teams may have a moment to take a breath from fundraising — and yes I know you’re spending all day reassuring LPs that the portfolio, on average, will survive the ventilation period — it’s also a good time to fundamentally revisit your marketing materials to make sure that they are on point. Get an outside perspective, if a fresh pair of eyes is needed.

Raising for a company or a start-up in the current scenario

From the numerous conversations that I have had, VC and PE investors are as busy as they have ever been. Yes, a fair chunk of their time is going into firefighting in the portfolio, but those with unspent capital are also acutely aware that investors who are less smart, or have less access to capital, or do not have private investments as their core strategy, are likely to withdraw from the market at this point. Simple demand and supply dynamics suggest that deal volumes will reduce, and deal pricing will normalise. Which means that it’s a good market for investing.

Pensions & Investments noted that 2,851 venture deals worth a total of $50 billion and 1,211 buyout deals with an aggregate $94 billion closed in Q1 2020. The pessimists have noted that these numbers represent a fall of between 12% and 23% compared to the same times last year (depending on how you look at it). As an optimist, I see the $144 billion of closed deals and wonder how much your firm is seeking to raise? To top it off, there is still a further $2-2.5 trillion of private markets dry powder out there for these investment companies to deploy — more than twice what there was in 2012. In short, for good businesses, the investment dollars continue to be there.

Data from Preqin and Bain & Company; Analysis: TK-Advisory

One market that I am closely tracking is China — it entered the Covid-19 crisis in December 2019, and so is roughly 2–3 months ahead of the rest of the world in terms of the financial markets response. The FT noted that post-COVID lockdown, Venture Capital activity in China in March was up sixfold vs February, to $2.5bn. One month is not a trend; however, I am looking forward to seeing the April and May numbers, as they may form a leading indicator to how private markets respond in Europe this summer.

PE Hub quotes LACERS CIO Rod June seeing “a big increase in capital calls”, which he in part attributes to fund managers already finding opportunities to invest at more normalised valuations. Similarly, Private Equity Wire reported last week: “this week has been a busy one for the tech sector with a number of deals reported in the seemingly relatively healthy VC space”.

So, PEs and VCs do have the money, and good deals will be done.

My advice: Use the time also to upgrade business models to make them more “all-weather”

The enforced lockdown is a great chance to test whether your company’s strategy is truly “all-weather”. In many ways, if you are still a relatively young company, you are lucky that such a test has come so early in your life. Painful as it currently feels, it is a really good opportunity to revisit your strategy and operations, and consider what changes are required to weather outside storms. These crises are not as rare as you may think, by the way. They come roughly once a decade — the tech bubble burst in 2000, the Global Financial Crisis in 2008, and the Covid-19 crisis in 2020 — so they will come again multiple times in your company’s life, especially if it’s a successful company. Test and reconfigure the business model, where needed. Also consider whether there are other adjacencies, products, client types, or distribution channels that you can add that may make your company more diversified and more stable through various economic phases. Multiple clients of mine are doing just that right now.

Finally, for those entrepreneurs who know that you have a tendency to get into the product a lot and haven’t focused enough on marketing, pitching and preparing to get your company set for fundraise, here’s a great time to do that. Take your marketing and positioning documents from an 8 to a 10, and watch the difference when it comes to fundraising.

In Conclusion

None of the above is to say that fundraising today is a walk in the park (not that a walk in the park is legally easy either these days…). It isn’t. All I am saying is that in a world of pessimism, I choose to see it as glass three-quarters full. Use the current time to prepare, and if you are prepared, have a good business model and your marketing decks are all set, go forth and ask the question!

TK-Advisory is a boutique firm which advises private equity and venture capital firms on their marketing and pitching, as well as supporting through other Investor Relations functions. We also advise companies on the same aspects, in addition to aiding in strategy and operations.