There was a time when private equity fundraising was, at least to some extent, rather predictable – one need only have looked at when a firm’s last fund was raised to form a rough idea of when it was likely to return to market. 

Fast-forward to 2022, and fundraising timelines are anyone’s guess. Many firms are now in a near-continuous state of fundraising, either due to a proliferation of strategy launches and platform extensions, or because the process can take so much time that one ends as another begins.

Case in point: firms were waiting just 16 months between successive fundraises as of 2020, nearly three times faster than the 47-month wait five years prior, according to MJ Hudson’s latest Private Equity Fund Terms Research. As a result, private equity fundraising has become more congested than ever before, with firms seeking more than $1.2 trillion between them as of 20 July 2022, according to Private Equity International data.

Here’s how the fundraising landscape has evolved over the past two decades.

Fundraising totals

Perhaps the most notable change over this period has been the amount of capital raised for private equity. In 2008 – which partly reflected the heady pre-crisis fundraising environment and is also the furthest back PEI’s data reaches – some $442.4 billion was raised across 938 funds. Last year’s total was nearly double that, with $780 billion raised across 1,890 funds. 

Average fund sizes are also creeping up, as LPs seek to consolidate relationships with a smaller pool of managers. The average fund closed on $542.3 million in the first half of 2022, compared with $350.8 million in full-year 2016 and $375.9 million in 2009. Only in 2008 did they come anywhere close to that number, at $471.6 million. 

Of course, growth hasn’t been continuous. Fundraising in the years following the global financial crisis was muted to say the least: GPs raised just $248.9 billion in 2009 and $204 billion in 2010. 

The pre-GFC market was “still relatively immature and the majority of firms were jockeying for position, but importantly most of the market got funded and that leads to perhaps one of the most relevant take-aways – it was a lot easier to raise money for firms on average pre 2008”, Warren Hibbert, fundraising veteran and founder of placement firm Asante Capital, notes.

“There was a large supply of capital entering private markets – initially primarily private equity – and relatively few players and hence all you needed was some time at a reputable investment bank or consulting firm, some entrepreneurial spirit and you were off.”

One key outcome of the GFC was bringing the industry under the purview of regulators. Among the wide-ranging 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was the Volcker Rule, which – though it didn’t fully come into force until 2015 – limited the amount of capital big players like banks could invest in the asset class.

Mega-managers

It wasn’t until 2016 that fundraising surpassed 2008’s total: funds raised $3.84 trillion between 2016 and 2021, almost double the $1.97 trillion collected in the preceding five years.

Much of this growth can be attributed to the handful of firms such as KKR, Blackstone and the Carlyle Group that are increasingly transforming themselves into one-stop-shops for private markets investing. KKR broke records to reach the top of this year’s PEI 300 ranking, having raised $126.5 billion for private equity alone over the past five years. Blackstone came second with almost $82.5 billion raised for the asset class.

These firms are responsible for the return of the vast mega-funds originally seen (albeit less frequently) immediately prior to the GFC. Blackstone, for its part, is reportedly seeking $30 billion for its latest flagship, having raised $26.2 billion for its predecessor in 2019. Carlyle is seeking $22 billion for its Fund VIII and EQT €20 billion for its Fund X.

“The bifurcation is staggering and sends a very clear message that whilst there is a premium attached to returns, there is a perceived ‘safety net’ provided by the largest managers around the world, who for the most part have been around the longest too – so clearly [there’s] some survivorship bias,” Hibbert says.

He notes that “the largest are getting larger at an ever-increasing rate”, leading to another major change in the fundraising market – “the evolution of many GPs into global asset managers, who once started life as a small PE fund and now manage hundreds of billions in almost every capital market product you can imagine – and imagining more is where a lot of their attention is focused today”.

Mega-firms are often publicly listed and therefore have an incentive to raise increasingly large sums of fee-bearing capital across bigger funds and new strategies. With the number of listed firms increasing – EQT, TPG and PEI Group-owner Bridgepoint have all gone public in recent years – so too might the number of mega-funds scooping up vast amounts of LP capital.

LP communication

With many firms now either in a constant state of fundraising, or at the very least pre-marketing their next vehicle, LP communication also becomes much more frequent. This dynamic has been exacerbated in 2022 by a highly congested fundraising market, which means GPs need to warn LPs well in advance to set capital aside for their upcoming fund or risk missing out on an allocation.

“Interim communication is more critical to the success of a fundraise,” Jackson Chan, co-chief executive of GP advisory Thrive Alternatives and a former managing director at Eaton Partners, says. “GPs cannot just show up when they are fundraising – staying in front of LPs in between fundraises is equally, if not more important, and re-ups are not a given these days.”

Beyond proactivity, LPs have also come to expect far greater transparency from their GPs in recent years – something that might have seemed unthinkable two decades ago. In 2007, Carlyle co-founder David Rubenstein told PEI that “even if every private equity firm agrees to disclose every single thing about everything we do, that isn’t going to dissipate all the objections” to the asset class.

In 2022, LPs are increasingly seeking not only granular detail about a fund’s underlying portfolio, but also esoteric data relating to ESG and impact investing KPIs. For some investor relations professionals, a lack of standardised demands and metrics has developed into an administrative headache. 

However, the emergence of industry groups such as the ESG Data Convergence Initiative, the creation of which was led by two private markets heavyweights – the California Public Employees’ Retirement System and Carlyle – and comprising other GPs and LPs representing more than $24 trillion in AUM at the end of August 2022, should go some way to resolving these issues in the future.

“Today, ESG and DE&I themes are an integral part of the decision-making process for most LPs,” Niklas Amundsson, a partner at placement firm Monument Group and a former partner at MVision, says. “However, this is not a one-way street, as GPs too have become increasingly focused on the sources of funds, wanting to align themselves with ethically like-minded investors as they look to a future of multiple fund cycles.”

The method through which GPs communicate with LPs has also shifted, particularly during the pandemic. “In the 2000s, fundraising was very much a physical sport; managers had physical data rooms in their offices, where they stored hard copy documents in giant filing cabinets,” says Amundsson.

“Administrative or junior staff were often assigned to sit in and oversee LPs’ due diligence, making sure all documents were put back where they belonged and not removed. In the 2010s, managers would travel to conduct in-person fundraising meetings, but most GPs had moved over to virtual data rooms, offering security features such as watermarking of documents and non-downloadable files. 

“Today, most introductory meetings take place over Zoom and many VDRs have pre-recorded videos – with subtitles in multiple languages – of interviews with portfolio company CEOs and tours of their offices.”

Placement agents

Back in the heady days of 2006, fundraising was a relatively straightforward business. “Pre-crisis, there were a lot of placement teams whose model was effective and sustainable in a boom,” one placement agent told PEI in 2011. “They essentially threw a pitch out there, and if it stuck with a particular investor, great. If it didn’t, they’d just move on to the next one.”

Since then, a burgeoning GP advisory and placement industry has emerged to help firms raise funds or make new LP relationships. In recent years, however, the demands placed upon these intermediaries has shifted.

“[There’s been] growth of regional fundraising specialists against the more traditional global placement agents,” says Thrive’s Chan. “GPs and LPs are just demanding a different level of focus and service – the old model of global placement agents is broken.”

Placement agent models are shifting in many ways. Some are taking mandates from more established GPs that, unlike emerging managers that might need help with the entire process soup to nuts, instead wish to diversify their LP base into regions where they have limited relationships or understanding of local nuances. Rising appetite for co-investments over the past decade has also prompted some placement firms to bulk up their direct fundraising teams, which raise capital on a deal-by-deal basis rather than for blind-pool funds. 

Different structures

An ongoing trend in private equity fundraising is a shift in some LPs’ appetites towards structures beyond the traditional blind-pool fund. Separately managed accounts are one such example. 

These have become an increasingly significant source of new commitments for many large asset managers: the largest LP commitment tracked by PEI data in 2021 was not to a commingled fund but to an SMA: CalPERS’ $1.4 billion mandate with a Summit Partners-managed vehicle. CalPERS has been prioritising “cost-advantaged” economics via fund interests, co-investments and SMAs to bolster allocations and returns.

Many investors over the years have also developed an appetite for co-investments, which offer direct exposure to choice assets with favourable economics attached. Such deals also tap into rising LP demand for transparency.

“What I like about [co-investment] is it enables investors to look under the hood,” Amanda Tonsgaard, head of investor services and communications at Triton, said at PEI’s Investor Relations, Marketing & Communications Forum: Europe 2022 in October. “I don’t think it’s going to go away.”