Five lessons for today’s fundraising market

In today’s complex fundraising environment, adopting different strategies and targeting new investors can provide a competitive edge says Matthew Goldstein, partner at Paul, Weiss.

With the current slowdown in fundraising likely to continue through 2023, private equity fund managers will need to adjust their approach to securing new capital and to protecting their funds and portfolio companies. 

Matthew Goldstein

GPs are still successfully raising funds, but the pace has slowed, which means the process will involve finding creative ways to navigate constraints. From a legal perspective, there are five major factors private equity firms should keep in mind as they seek to generate capital and liquidity in 2023.

Pick your battles

GPs need to be discerning about which terms they want to push in their fund documents. Given the diverse objectives and liquidity needs of investors, managers need to consider creating more flexibility around the classic fund model in order to address the need for funding at all stages of a company’s life cycle. For example, GPs could create options to facilitate secondaries transactions and restructurings, or to use subscription line credit facilities to assist with cash management.

Change your strategy

Game theory and other similar strategies will be the norm for managers during the offering process in 2023. Given the bandwidth issues facing LPs, managers should leverage repeated, targeted communications to drive momentum. For example, many GPs are adopting diligence platforms to streamline questions and more efficiently manage a diverse range of LPs. Some are investing in intelligent trackers and side letter platforms that monitor the various stages of LP negotiations and help maintain consistency.

Consider the consequences of longer fundraises

Top managers are keeping their funds open for longer to avoid selling in an unattractive market. This has some consequences: LPs receive less frequent distributions, meaning less capital is available to invest into new funds. This year, GPs should expect to help LPs navigate their liquidity by exploring historically less-travelled pathways such as tender offers and NAV facilities. Longer fundraises also create more pressure on ascribing valuations to existing investments, so GPs should make sure to have an appropriate amount of flexibility in their fund documents to allow new investors to come in at different valuations. 

Identify new capital sources

The investor class known as the ‘mass affluent’ is a growing source of opportunity. To avoid historical obstacles such as high fees, commitment minimums and regulatory impediments, GPs are spending more time frequenting a variety of entry points for the mass affluent, including platform feeders, private wealth manager feeders and perpetual products, including registered products that invest side by side with private funds. 

To overcome complex administrative and compliance issues, GPs are turning to tech-enabled, automated fundraising platforms that consolidate a high volume of small-ticket investors. With the mass affluent likely to gain more access to the market in 2023, managers should consider creating more opportunities to onboard and service this promising capital source. 

Learn to navigate a scarcity of capital

There are creative ways to come up with capital in a market slowdown, including by increasing flexibility with respect to recycling and using follow-on investments. In this type of market, more flexibility is desired to extend the offering and commitment periods, create bridge or interim funds, and increase co-investment activity. Further, more flexibility is desired in the use of affiliates to provide debt financing in an unattractive debt market. Though some of these options may have once been viewed as credit fund terms, now would be a pertinent time to leverage them.