LPs enjoy a little breathing room

There is no denying the fundraising slowdown has been a source of stress for GPs, but for LPs it has meant feeling much less harried.

“I think on balance, it’s more appealing to be committing capital as an LP now than it was a few years ago,” said Allen Waldrop, director of private equity for the $78 billion Alaska Permanent Fund. “It’s taking longer to raise funds, so LPs have more time to do the due diligence, evaluate the managers, and you can watch the track records evolve over time. If you’re concerned about the [valuation] marks and how they’re evolving, you can wait a quarter or two.”

I spoke to Waldrop by phone this week after meeting him in person at PEI Group’s NEXUS 2024 event, which brought together more than 500 LPs, GPs and advisers in Orlando last week. I called him to discuss growth investing, but our conversation naturally flowed into what he’s seeing in the broader market.

“Obviously, the very best managers are still able to raise capital really quickly, but I think people [LPs] have time to do their work now,” he said. “[As an LP], who you commit to really matters. In a frenzied market, who you commit to matters less because you will still get strong returns from the market. But we really want people who are going to outperform the broader market.”

To do their jobs properly, LPs can’t be rushed. It isn’t as simple as looking at the MOIC or IRR of a manager’s previous funds.

“The ticket to the dance is the strong performance over a long period of time,” Waldrop told me. “And then we really want to understand how it [the GP] got that performance. How are they sourcing the deals? What edge do they have over others? Then once they are in the deals, what are they doing to add value to the company? Do they have a particular expertise in an industry or a subsector? Do they have a particular expertise in a functional area? If we talk to the management teams of the portfolio companies, what would they say about the value of the manager and how involved they are? Who do they turn to when they have important strategic decisions and things like that?”

That’s a whole bunch of questions, and LPs need time to get answers from GPs to make an informed decision about whether to commit or pass on a fund.

Another LP glad to have more breathing room is Eneasz Kadziela, head of private equity for the New York City comptroller, which oversees the $83.6 billion New York City Employees’ Retirement System.

“In 2021, we were cracking at the seams in terms of how our small team was reacting to the deluge of funds coming back… that was a tough environment for LPs to go through and our system and infrastructure was not set up to process such turnover,” Kadziela told Warburg Pincus CEO Chip Kaye in an onstage interview at NEXUS.

“What we have now is a healthy environment,” Kadziela added. “It’s forced GPs to slow their pacing. GPs have to raise the bar for new investments. LPs can now see more proof of how portfolio companies are performing and how GPs are adding value in their current fund.”

Kaye agreed that the current environment will show who the top managers really are. “When you live in a version of the environment we’ve lived in for a long period of time, it’s sometimes difficult to figure out why people made money and whether that is something that is sustainable,” he said.

None of this is to suggest that LPs are sitting back and taking a break. In fact, those that aren’t overallocated to private equity are finding now is a perfect time to grow their PE portfolios. The $52 billion New Mexico State Investment Council is among the LPs actively adding managers.

“Some of these managers we haven’t had access to before… but now some of the big pensions are starting to pull back,” New Mexico CIO Robert “Vince” Smith said in a video interview on the sidelines of NEXUS. “If suddenly you’ve got two or three state-level plans and a couple big endowments that can’t re-up, here we come.”

The sovereign wealth fund has been especially active in venture, committing more than $660 million combined to 23 VC funds in the past two years, according to affiliate title Venture Capital Journal research. That’s a big jump from combined commitments of $368 million to 17 venture funds for 2018-21.

The current environment is allowing New Mexico to be thoughtful as it grows its PE portfolio. It plans to commit $1.3 billion to private equity in FY 2024, up from the estimated $1.2 billion scheduled for the previous fiscal year, then boost that number to $1.5 billion in FY 2025, $1.6 billion in FY 2026 and $1.8 billion in FY 2027, according to a report by affiliate Buyouts (registration required).

Said Smith: “Right now we’re just focused on increasing our private equity exposure – a lot in growth equity and our private credit portfolio.”

Chris Witkowsky contributed to this story