GPs face the music: The new reality of a ‘failed’ fundraise

Multiple managers have either closed or expect to close their latest private equity flagships below target – something unthinkable a few years ago.

Private equity’s halcyon days of one-and-done fundraisings with lofty oversubscriptions now seem to be in the rear-view mirror, with managers and LPs alike increasingly having to reconsider what constitutes a successful – and, by  extension, an unsuccessful – fundraise.

Few managers are immune to private equity’s fundraising crunch, with many existing investors writing smaller cheques and GPs facing an uphill battle getting new investors in.

“You’re kind of, in a way, getting pummelled from all angles,” Karl Adam, partner at Monument Group, tells Private Equity International.

Blue-chip firms – usually fundraising powerhouses – are no exception to these headwinds.

The Carlyle Group, which collected $950 million for Carlyle Asia Partners Growth II against a $1 billion target, is laying the groundwork for further closes under original expectations.

“While we believe that we will attract a significant amount of capital for our next vintage of buyout funds, we no longer expect these funds in the aggregate to be the same size as their predecessors,” chief financial officer Curt Buser said on the firm’s first quarter earnings call in early May. “We now expect to see a decline in buyout fund sizes across most geographies.”

Apollo Global Management expects to wrap up fundraising for its flagship vehicle Fund X over the summer with commitments in the “low-$20 billion range”, co-president Scott Kleinman said on a first-quarter earnings call on Tuesday. The firm has been targeting $25 billion for the vehicle – its predecessor raised $24.7 billion in 2017.

“You’re kind of, in a way, getting pummelled from all angles”

Karl Adam
Monument Group

Kleinman noted on Apollo’s third-quarter earnings call last year that the firm was keeping fundraising for the vehicle open until the first half of 2023, citing the fact that investors were facing allocation constraints due to the impact of the denominator effect and a crowded fundraising market.

TPG CFO Jack Weingart also told analysts on its full-year 2022 results in February it was “too early to tell if we will hit all of our targets,” but that the firm “[felt] very good about the progress we are making across all of those funds”. The firm has raised $8.8 billion against a $15 billion target for TPG Partners IX, according to PEI data, and is also in market with vehicles including Rise Fund III and TPG Healthcare Partners II.

Compared with the lofty heights of previous years, a vehicle that can now reach its original target within a year of launching would be a decent outcome, Monument Group’s Adam adds.

Not all funds in market have managed to achieve this and PEI is aware of a handful of funds, some of which are sizeable, that are stuck in their fundraising processes.

Placement agents appear to differ on what constitutes a failed fundraise in this environment. Some suggest that LPs may be understanding, given the current market dynamics, if a firm expects to close under target; others say closing below target is never a good look.

There is no definitive way to assess an unsuccessful fundraise, given there are factors around when a fund entered the market. Still, the size of its predecessor can be used as a benchmark, according to Kelly DePonte, managing director at Probitas Partners. ”[If a fund is] 25 percent to 30 percent below that… that means that they may be on that list that their current LPs are shorting.”

Controlling the message

Messaging – both to their LPs as well as the wider market – is becoming a key focus of private equity firms and their advisers. Those that stand the best chance of reaching their targets will have started the work earlier.

Some GPs are holding rolling or ‘quiet’ closes to build up commitments and momentum before a formal first close, at which point the clock starts ticking on how long it is able to stay in market or request an extension.

Extensions, too, are becoming more commonplace in the market as managers try to reach targets.

“I would expect everyone to get away with one extension,” Niklas Amundsson, a partner at Monument Group says, adding that second extensions become a trickier conversation to have. “If you haven’t managed to raise it within two years, adding another two years is not going to make the difference.”

Meanwhile, placement agents are working with managers to set reasonable targets for funds. In some cases, it has been prudent to revise targets down.

For those managers who had set a target at the beginning of 2022 and are still in market with a vehicle “you probably should have adjusted”, says a US-based placement agent, who wishes to remain anonymous. It is possible to adjust the target out of the public eye and explain the rationale to existing investors, who like that approach and “don’t want you hanging out there forever”, the placement agent added.

“If you haven’t managed to raise it within two years, adding another two years is not going to make the difference”

Niklas Amundsson
Monument Group

Advisers are urging managers to be sensible when setting targets. Re-ups are on average now 70-75 cents to every dollar allocated in prior funds, says Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

“They’re putting money in, but you have a gap compared to last vintage’s commitment,” she says. A GP that sets a target that is a big jump off of the prior fund raised in this environment “would be a very brave one”.

Managers are also being cautious around disclosing hard-caps and, in some instances, even targets. GPs are looking to keep quiet on a hard-cap figure until first closers look to box managers into a number, the anonymous US placement agent adds.

Some managers have opted to take it one step further – forgoing a target completely to raise as much money as possible, without the concern of being deemed a failure by setting ambitious aims, DePonte says, adding that this has tended to happen more with some VC managers and buyout managers that have “really hit it out of the park”.

GPs may have an informal and aspirational target with their LPAC that they will not disclose in SEC filings, DePonte notes. They may also opt not to put the target on the front pages of draft limited partnership agreements.

This trend is the reverse of what’s happening in Asia-Pacific, according to Amundsson. “Traditionally, if you were an overly popular Chinese venture manager, you would have had a little bit more flexibility [around setting targets and hard-caps]… but your strategy in 2023 is very much out of favour,” Amundsson says, adding that if funds want to engage with LPs today, they have to do it on their terms.

“There’s always going to be a few people that get away with murder, but I would say that for the rest of us, it’s becoming kind of a little bit more sort of more straight down the line,” he adds.

Best case, worst case

Fundraising can hinder managers’ ability to invest in deals. Investors typically are not thrilled if a GP stays in market for an elongated period, which should factor into how long the fundraising process is run for. Ultimately, when extensions run dry, vehicles will have to close.

Such a dynamic may prompt some managers to rebrand vehicles with labels such as bridge funds or annex funds.

Ultimately, those managers who do close their funds under target will have to prove themselves with exceptional returns and return to market when conditions have improved, just as many others had to during the global financial crisis, the placement agents PEI spoke with says.

Some LPs within the fund may also be open to co-investment opportunities, which will allow the manager to bolster the size of the deals the vehicle is able to invest in, Adam says.

“We lived in an environment in 2019 and 2021 where you built it and they came… That time in the market’s cycle has gone and we won’t see years like that any time soon”

Sunaina Sinha Haldea
Raymond James

Nevertheless, funds that dip substantially below the size of a predecessor fund, as well as their target, can cause significant issues for managers.

For those that close 25 percent to 30 percent below their prior fund, as DePonte suggests, managers will either have to cut back on the size or the number of investments, which may leave them with too many staff. Principal-level employees, who often serve on boards and have been working towards a point where they’ll be collecting carried interest, may opt to spin-out of the firm, he adds.

“That’s one of the things when you’re talking about a failed fundraise, it really is [a question of] how badly is the GP affected,” DePonte says.

Managers who thought they were immune to the choppy fundraising environment and ploughed on as they have in recent years may have to face the music.

“Unfortunately for these groups, we lived in an environment in 2019 and 2021 where you built it and they came. In a world where LP allocations to PE were increasing year over year, you could put a target out there and oversubscribe it, as long as you had decent returns,” Sinha Haldea says.

“That time in the market’s cycle has gone and we won’t see years like that any time soon.”