If investors thought 2023 would be a calmer year for private equity fundraising, they may have another thing coming.
A crowded fundraising calendar coupled with the numerator and denominator effects on portfolios have significantly squeezed LPs’ allocations, as well as their resources, this year. Many investors have struggled to accommodate all of the re-ups hitting their desk at once.
As a result, some LPs have asked GPs to keep their fundraising processes open until the new year, when they will have a new annual allocation from which to commit. This in turn may leave them with less capital to commit to 2023-vintages, exacerbating the allocation headaches that have plagued much of the investor landscape throughout 2022.
“A lot of GPs came out thinking, ‘We’ll do a one-and-done-close in 2022, we’ll be done by summer’ and then all of a sudden the LPs said, ‘No, stop, we can’t keep up with that,'” Rhonda Ryan, partner in Mercer’s alternative assets business, told Private Equity International. “So even some very, very good names are pushing out their fundraising timetable.”
Though next year was expected to be a quieter fundraising calendar, the pandemic has caused many fundraising processes to arrive at once, either because of a slowdown in investment pace delaying when managers needed to come back to market, or because GPs simply felt it would be better to wait until they could see GPs face to face, Ryan said.
Looking at Mercer’s global fund pipeline for the next 12 months, Ryan described “a very, very long list”, which will become a knock-on problem into 2023.
Many GPs will no doubt feel that raising a smaller fund than their previous vintage will be seen as a failure. With that in mind, funds can expect to stay out on the fundraising trail for a much longer period than they have done historically.
For this reason, a number of investors PEI spoke with expect less aggressive steps up in fund size than the market has seen in past years. Those managers heading out to market should also have the advantage of learning from the mistakes of those currently in market.
The LP community and their advisers are taking a variety of approaches towards private equity’s congested fundraising schedule. Global investment firm Cambridge Associates, for example, has planned more than 90 percent of its expected allocations for its mature portfolio, most of which is weighted towards re-ups in 2022 – a figure that is in line with prior years, said Elisabeth Lind, managing director in the private client practice. She has, however, been looking to reduce commitments downwards as managers surge back to market with fundraisings, and in some cases cutting names.
“For those [investors] that have ample diversification you can sort of say, okay, we probably don’t need three of these,” Lind said. “When they were only raising every three years it was okay, but now… they’re raising every 12 months – so no, we can’t keep doing this. We need to take some risk off the table.”
Not everyone is content with smaller ticket sizes. “You want to pick your best managers and invest with them,” Mercer’s Ryan noted. “So I do think for some GPs, there’ll be a fall out. They won’t perhaps raise as much capital as they thought they were going to raise, and it’s certainly going to take them longer to do it than they anticipated.”
Some GPs are wising up to the realities investors are facing and reacting accordingly. Managers of $500 million-plus funds, which require larger tickets from numerous investors, are starting to time the market, said Matt Swain, chief executive at Triago.
“They’re looking at the market and saying, okay, if we were going to come out in Q4 of 2022, let’s come out in Q1 or Q2 of 2023, but let’s elongate the pre-marketing period,” Swain said, noting that this has jumped from an average of three months to 12 months over the past year or two. “It’s a pretty dramatic shift. And obviously, LPs tend to like it when you come to them and don’t ask for a cheque immediately – especially in a busy re-up market, a busy fundraising market like it is.”
As managers adjust to the challenging fundraising environment, LPs are hopeful the end of 2023 will see a rebalancing of the fundraising bottleneck. “Because of the stress in the market, because of uncertainty, you’re going to have fewer opportunities and less capital will be put to work as a result, and therefore funds won’t come back to market as quickly,” Lind said. “So we just need to get to that point.”
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