I’ve been hearing a lot lately from LPs about their anticipation of an impending season of extension requests. And some of them are getting ready to wrestle concessions out of humbled GPs.
Because of the tough economy, GPs will be looking for more time for everything from fundraising, to deploying a fund, to pushing back the terminal date of a fund’s life.
Rising interest rates are stifling financing activity, which is putting a damper on deal volume, including exits. As GPs have a harder time making deals, they will likely need more time to deploy their funds beyond the (usually) five-year investment periods. And they will potentially need more time to close out funds beyond their 10-12 year terms.
As well, as overallocated LPs grow stingier with their capital and fundraising slows, managers out in the market will need more time to close funds.
Such extension requests require the approval of limited partners of the fund in question, who perhaps at one time would have given rubber stamp approval over a request like an investment period extension (depending on circumstances, natch).
But, there’s a bit of a different dynamic today. As one LP put it, fund investors have been itching for their chance to push back at what they’ve seen as piggish behavior on the parts of GPs. When GPs come calling with their various extension requests, it can lead to negotiations with LPs on offering concessions like fee breaks.
“The duration of everything has just been extended,” the LP said. “There’s pent up demand from the LP community to give it back to a lot of these GPs. We have long memories and a lot of them have been pigs.”
Overall, LPs have seen increasing desperation among GPs clamoring for capital. Fundraising has taken a dive off the cliff the second half of this year with LPs tapped out of capital and overallocated to the asset class.
With distributions drying up, LPs have less capital available to recycle into re-ups or form new relationships. Many LPs are ruthlessly culling their portfolios, leaving space for only their top performers, and that will leave many managers out in the cold, desperate for capital.