Most LPs will increase commitments to distress, special situation funds: survey

Institutional investors are also sticking with managers in geographical areas they've previously invested in.

The coronavirus pandemic has made institutional investors lean toward allocating more resources to sectors that can withstand a volatile market, according to a recent survey from Cebile Capital.

Around 57 percent of LPs surveyed said that they will increase their allocations to distress, turnaround and special situation funds; 19 percent said they would maintain their allocations; two percent said that they would decrease their commitments to those funds; and the rest said they had no specific allocations to those sectors.

“[LPs] would under-weigh those strategies going into covid and would like to increase their exposure to those markets,” Cebile Capital’s founder and managing partner Sunaina Sinha told Buyouts. “Distress, special situation, turnaround and secondaries are the four areas that are likely going to see the most flow from LPs.”

And in a Q1 2020 earnings webcast, as previously reported by Buyouts, Brookfield Asset CEO Bruce Flatt said, “this is one of the great environments possibly to buy distressed debt that may have ever been in existence.”

In March, Los Angeles County Employees’ Retirement Association said that it had plans to make investments to distressed, special situation and value-oriented managers, according to sister site Private Equity International.

At the onset of the global financial crisis in 2009, LACERA paused its private equity commitments, a move that CIO Jonathan Grabel said was a mistake, Buyouts previously reported. In May, Grabel said that LACERA has “expanded its investing capabilities” by going after co-investments and secondaries. The system did not change its private equity pacing plan amid the pandemic.

LACERA previously committed $160 million to Clearlake Capital Group’s distressed/turnaround fund, Clearlake Capital Partners VI, which focuses on consumer goods, industrials and the TMT industries, PEI data shows. LACERA did not return Buyouts’ request for comment.

While LPs have plans to increase their investments to distress and special situation funds, most are maintaining their investments to managers in North America, Europe, Asia and other parts of the world, according to Cebile’s survey.

In polling by region, around 73 percent of LPs said that they plan to maintain their allocations to managers in North America; 60 percent said they will maintain commitments to those in Europe, and 50 percent said they would do so in Asia. “When faced with market volatility and uncertainty, LPs tend to focus their attention on what is familiar and easier for them to understand,” Sinha said.

Newer GPs, however, may find challenges in getting LPs to invest outside of North America, according to Sinha. “These are uncertain times, and LPs will be reticent to add an extra layer of uncertainty by moving into uncharted waters,” she said.

Action Item: Check out other Cebile Capital reports here.

Update: A previous version of the story said that LACERA paused its PE commitments at the start of the pandemic. The story has been updated to reflect that commitments were paused during the global financial crisis in 2009.