Fundraising deadlines extend, anxiety over incoming SEC rules

We have some market intel for ya from LP land. Seems new funds that have hit the market over the past few months are including a lengthened fundraising deadline that reflects the challenges GPs are having raising capital.

GPs are asking for fundraising deadlines of 18 months and even as long as two years – which would run from first to final close. This is a significant increase from what has been the normal market timeline for many years – 12 months plus extensions.

“The fundraising market is brutal now. There’s a lot less shame in a sponsor saying, ‘We need more time to fundraise than in the past’ – sponsors are less self conscious about it,” said Stephanie Srulowitz, a partner in Weil’s US private funds practice.

Longer fundraising processes come with their own challenges for GPs, including making sure every LP in a fund is on equitable footing when it comes to cost and investment exposure. For LPs that invest later in a fund, how do they “true up” to the costs presented by early deals that happened before their commitment? Especially if those investments have changed in value during the fundraising. Read more here on Buyouts.

Regs: Rumors abound that the SEC may soon finalize rules that could, if codified as originally proposed, fundamentally change how private equity operates, as I wrote last year.

I’m hearing the rules could be finalized in the next few weeks, even as early as next week. Yet, sources are all over the place about whether the rules will change significantly from their original form, or if the SEC will move ahead with minimal alteration despite extensive comments against the rules as they were introduced.

One of the biggest points of anxiety in the proposal is a rule that would strictly regulate firms’ use of side letters, ostensibly as a way to even the playing field for all LPs. The irony is that any forced restrictions on side letters would ultimately benefit GPs rather than the LPs who are the alleged beneficiaries of such a rule.

The SEC’s rationale in restricting side letters is that only certain preferred investors get economic or governance benefits through the use of side letters unavailable to smaller institutions. These agreements can have “material, negative effect” on other investors.

Because of this, all LPs in a fund should know what kind of secretive side deals some LPs are getting, according to the rules. Yet many LPs rely on side letters to help mold and shape their GP relationships in a way that benefits them and their constituencies.

“Side letters, in effect, constructively advance reporting on evolving market practices, thereby promoting greater transparency to investors. Side letters are a crucial means for market innovation. Investors have limited tools to advance market practices. Side letters are key – if not the most powerful – among them,” Los Angeles County Employees’ Retirement Association CIO Jonathan Grabel wrote to the SEC last year.

The industry has dealt with side letter disclosure to some extent, through the use of what are known as Most Favored Nation clauses, which let LPs review other side letters and in some cases receive the same terms. MFN clauses work in various ways – some GPs will grant MFN reviews to every LP in a fund, while others may allow MFN reviews based on commitment size.

I wrote long ago (back in 2015!) that some GPs were making efforts to restrict the use of side letters in their funds. The process had grown unwieldy and LPs were apparently looking for side letters to address all kinds of issues, not just for the most necessary issues addressing legal or tax restrictions.

I take it that the side letter ask has gotten no less burdensome over the years, and any sort of relief, even one imposed by the SEC, could be viewed as a welcome change by GPs.

That’s it for me! Hit me up with your thoughts, tips and gossip or feedback at cwitkowsky@pei.group, or find me on LinkedIn.