Q&A with Adams Street fund investing chiefs on finding GPs in the dislocated markets

Adams Street Partners recently named the new global head of fund investments, Brijesh Jeevarathnam, succeeding Kelly Meldrum, who is retiring. Also, Saguna Malhotra was promoted to head of global buyout fund investments.

Buyouts sat down to chat with Jeevarathnam and Malhotra about the current environment for fund investments and how limited partners are approaching fundraising amid the market dislocation.

We’ve heard a lot about LPs pulling back their commitment paces as many contend with overallocation issues, slowing distribution activity and a plethora of funds in the market. How are you approaching the market?

Jeevarathnam: LPs are responding [to the denominator effect] by doing a few things in response to this environment. One is they are in some cases committing to the asset class but with a smaller number than last time. Two, they’re pushing their allocations back to 2023 first quarter versus this year. And three, some investors across the market are exploring secondary sales of their existing portfolio. We have a dedicated secondary team and we’re seeing deal flow increase on that side.

Sometimes when you see a headline or article about what happened this quarter, this month, it doesn’t do justice to the asset class. Having a more holistic view and time frame is the right way to understand this, in terms of valuations, capital calls, distributions, everything.

Two things are happening now: one thing is investors are much more versed in private capital cycles and therefore we don’t see any panic alarms going off, at least not yet. And number two, many of us kind of saw this coming. There’s been enough writing on the wall that no one is shocked. Maybe there’s a lack of clarity on where we go from here.

What are the implications of an environment of slower distributions?

Jeevarathnam: On the distribution side, there’s certainly been a slow-down this year. But that’s with the backdrop of 2021 and 2020, which were record years. Looking ahead, it will likely be slower for the next few quarters.

For investors with mature venture or buyout programs, this is all part of the capital planning process. It’s feasible for the next six months that capital calls will outpace distributions. It’s highly probable. But these investors have been in the asset class with mature programs, they have a three to five year view on this.

How is the market impacting GPs and fundraising?

Malhotra: We expect fundraising to slow down across venture and buyout funds, where VC might see an even more prolonged slowdown in terms of capital deployment.

GPs who were saying, ‘We need to close by the fourth quarter,’ are now saying, ‘We can hold off until the second quarter of next year.’ We expect a slow-down and a longer deployment period. But we have a core set of managers that have the skill set to manage through these cycles.

Jeevarathnam: In the limited time we’ve had [of market dislocation], it has been a tale of two markets. For the best managers, not much has changed. But for the rest, the market reality has had implications on their fundraising.

How has LP appetite for sector specialization changed in the shifting markets?

Malhotra: Sector-focused funds are here to stay. Competing as a generalist fund today is much harder. Our sector-focused managers are able to source better, address the needs of their portfolio companies better, they have broader networks, they can recruit more easily because they have the expertise.

What we’ve typically seen is smaller funds, $200 million – $300 million, can start out as generalist funds and evolve over time, while the mega-funds are typically generalists but have large teams dedicated to each sector. If you’re a smaller fund maybe you get away with being a generalist and mega-funds are mostly generalist, while everybody in between is trying to find their way in terms of sector focus.

Jeevarathnam: These comments apply on the buyout side, but also on the venture side, in VC and venture growth, we’re seeing the emergence of sector-focused funds in things like gaming, crypto and fintech, the list is long.

How is the challenged market impacting GPs’ plans for strategy expansions?

Malhotra: They’re not stepping back. It’s only been a few quarters of experiencing a more challenging market environment so it’s very hard to look at long-term trends in the context of private equity in such a short time frame. But given what’s happened in the last two and a half quarters, GPs we know well will continue to come to the market. Will that pace slow? Yes. Have we seen it slow? Not yet, there’s not been enough pain and maybe there won’t be. It’s too soon to tell in terms of whether we’ll see more product proliferation or less.