With many LPs both overallocated to private equity and contending with slowing distribution, the consensus is that 2023 will be a challenged fundraising environment. In particular, many market participants feel that one-and-done closes will be a rarity.
The number of funds finding themselves oversubscribed has been on the up in the past few years: just considering the top 10 fund closes from January to December 2022, GPs gathered nearly $32 billion more than the $110 billion they set out to raise, according to Private Equity International’s full-year 2022 Fundraising Report. Among them, Brookfield Asset Management saw the biggest jump from its initial target to the final close amount – 100 percent – for its $15 billion Brookfield Global Transition Fund.
Definitions vary as to what ‘oversubscribed’ really means. “There’s often a cap in the terms of the fund agreement that says you can’t raise more than X without LP consent,” Michael Wolitzer, head of Simpson Thacher’s investment funds practice, tells PEI. “When the GP says it is oversubscribed, it is saying that it received subscriptions in excess of that amount.”
According to the Institutional Limited Partners Association’s private equity glossary, oversubscription “occurs when demand for shares exceeds the supply or number of shares offered for sale”. It adds: “As a result, the underwriters or investment bankers must allocate the shares among investors.”
Meanwhile, Janet Brooks, a partner at placement firm Monument Group, defines oversubscription as when a GP has to turn away investors that want to get into the fund, or has to give investors a smaller ticket in the fund than they ideally would have liked, because they have reached the hard-cap. “Typically, you see oversubscription when the fundraising market is very buoyant,” she says.
In today’s climate, however, oversubscription isn’t happening that often. “This year, we are not seeing many one-and-done closes, but funds can still ultimately be oversubscribed,” says Brooks. “Most fundraising timetables are considerably extended and funds are having multiple closings before they reach their targets or hard-caps. This means GPs are continuing to reach out and engage with new investors – even well after the first close. With many LPs facing denominator and liquidity challenges, it’s hard to assign probabilities to their likelihood of investing, and so it could still end up… that ultimately, you’ve overreached and have to turn investors away.”
Dealing with popularity
Communicating with LPs early and frequently is key to managing expectations in a fundraise. After all, no GP or placement agent wants to be in a situation where they have to let investors down after they have done all the hard work.
“Any investor relations group or placement agent would certainly take measures well in advance to warn investors of any risk that they might get a smaller ticket than they ideally wanted,” Brooks says.
Where environments have changed significantly in between launching and closing, GPs could also potentially amend their targets based on investor feedback coming into the first close, Brooks notes.
GPs typically have their own guidelines when faced with the situation of turning LPs away, although most would end up giving priority to existing investors, it is understood. The process is completely at the discretion of the GP, notes Warren Hibbert, managing partner at Asante Capital, adding that GPs typically try to satisfy all LPs.
“But where there is interest in excess of the hard-cap, and assuming they can’t convince existing LPs to increase the hard-cap on the margin, they have to scale LPs back, and will typically cut back those who subscribed last.”
This year will be a trickier time for fundraising given market volatility and squeezed LP allocations. As a result, it is likely that funds will adjust their hard-caps down, depending on demand.