Private equity sponsors are adjusting fundraising timelines to mitigate a confluence of issues that have rendered the process more difficult.

A dramatic plunge in public equity holdings this year has left many LPs overexposed to private equity assets, whose valuations lag their public comparables. This denominator effect, as the dynamic is known, impacts US public pensions more than most due to strict allocation limits; changing these thresholds can be a lengthy, often bureaucratic process.

The problem has been exacerbated by a congested fundraising environment that has seen many GPs return to market at the same time, typically with much larger targets. LPs that were already close to or above their allocation limits have found themselves having to reduce the number or size of commitments so as to not make the issue any worse.

“What you see in the market today is that most GPs are speeding up their fundraising cycle,” says Jim Pittman, global head of private equity at the C$211 billion ($158.2 billion; €152.5 billion) pension British Columbia Investment Management Corporation. “The ability for most LPs to keep up is very tough, even for us who are proactive in the secondary market and always managing the portfolio to make sure that we’re maximising its value. We find it difficult to keep up with the pacing that the GPs are raising money at.”

Trouble brewing

These factors have conspired to make fundraising more of a slog.

With 2022 allocations largely spoken for, some GPs are keeping their funds open longer than expected to access next year’s capital. “The market is feeling a little bit soft, if you will, for managers that are raising in 2022,” says Craig Ferguson, managing director for private equity at the C$79 billion ($57.6 billion; €58.9 billion) Investment Management Corporation of Ontario. “A lot of them are stretching their closing dates into 2023 to try to get to additional allocations from institutions.”

Apollo Global Management, for example, said in November that it would keep Fund X – which is seeking $25 billion – in market until H1 2023 to accommodate investors’ annual budgets. This was due to the “impacts of the denominator effect and the sheer number of GPs in the market this year”, co-president Scott Kleinman told analysts on its Q3 earnings call.

Fund targets might be the next thing GPs tweak in response to uncertainty. “One of the benefits that could come out of this would be to have… managers not come out with larger and larger funds,” Ferguson notes. “We are definitely seeing… multi-vintage fund managers that are not able to reach their target fund size in the current market… We’ll start seeing fund sizes become a little more stunted, a little more conservative.”

– Graham Bippart, Robin Blumenthal, Mary Kathleen Flynn, Craig McGlashan, Andy Thomson and Chris Witkowsky contributed to this report.