A glance at the headline figures suggests GPs are bullish about the fundraising market. In May 2021, the Carlyle Group came to market with a target of $22 billion for its eighth flagship fund. This figure was matched in September by Thoma Bravo, whose Fund XV was launched just nine months after the firm held a $17.8 billion final close on Fund XIV, according to Private Equity International data.

In remarks reported last month by PEI, Carolin Blank, a managing director with Hamilton Lane, said that as of 1 December there were 15 managers in market targeting at least $15 billion: “If those 15 managers only raise $15 billion, we will already be at 55 percent of all buyout fundraising in 2020.”

Private equity funds raised $415 billion in the first half of 2021 – the highest level since 2008 – according to PEI data. That was a 53 percent rise on the same period the year before, and was driven by the economic recovery from the initial stages of the pandemic, LP demand and a rebound in deal volume.

Though impressive, these big numbers deflect from issues that were of concern in 2021 and that are likely to be even more concerning in 2022.

Private equity performed strongly last year, with US endowments – which tend to focus more on alternatives – providing a good demonstration. The PE portfolio of Harvard Management Company returned 77 percent in the 12 months to June, with Duke University and the Massachusetts Institute of Technology returning 56 percent.

This is not just residual value. “Distributions received during the first three quarters in 2021 have already set an annual record for the PE current return portfolio, and we expect a very robust Q4 as well,” said Scott Parrish, private equity portfolio manager at State of Wisconsin Investment Board, during the institution’s December investment committee meeting.

For the first time in a while, limited partners are at or above their allocation limits, just as a raft of established PE firms return to market asking for big cheques. Some 23 percent of respondents to PEI‘s LP Perspectives 2022 Study said they are over-allocated for 2022, a figure up from 13 percent the year before and the highest percentage since the first survey in 2018.

“Private equity is a victim of its own success,” said Yann Robard, managing partner of Whitehorse Liquidity Partners, a preferred equity firm that came to market last year targeting $5 billion for its fifth fund in the space of five years. “Unrealised [value] has gone up, GPs are coming back quicker… That is going to create a very challenging 2022 fundraising for GPs.”

Fewer, smaller commitments 

For over-allocated LPs, this means a more circumspect approach to deploying capital, which is likely to benefit the firms with which they have longstanding relationships. Still, nothing can be taken for granted. Some LPs are limited in their ability to invest in multiple offerings from the same manager. Such policies are becoming a bigger limiting factor as GPs return to market more quickly. Further, those GPs that do receive investment may not get the amount they were expecting.

“We just don’t have the capital that all our managers want to invest, so we have to be really selective… Double down on managers we committed to before,” said Teia Merring, investment director for private equity at Universities Superannuation Scheme, speaking at PEI‘s Women in Private Markets Summit last month.

“It’s going to be a real tough time for new managers to raise capital in this market because the majority of the capital will be allocated to safety,” she added.

For placement agents, the flight to safety has made it more difficult to market certain funds. Janet Brooks, a managing director with Monument Group, told PEI that it also means agents will have to look to a broader range of potential LPs than before. Emerging managers have particularly suffered from the reduction in face-to-face meetings brought about by the pandemic.

Some managers are timing their fundraises so they will come under budgetary consideration this year and next in order to increase their chances with an LP. Although the rate of attrition will be higher in 2022, there are still plenty of LPs with money to deploy. “I was speaking to a large fund-of-funds and advisory manager who said that last year was their biggest ever fundraising year,” said Brooks. “It’s about working out which investors have the capital to invest versus those who have very mature programmes.”

The number of US-registered placement agents has declined every year since 2016, PEI noted in its October Deep Dive, partly as a result of the trend towards GPs doing more fundraising in-house. For the firms that survived, the phone has not stopped ringing, as investor relations teams look for outside help in an increasingly capital-constrained environment.

FirstPoint Equity co-founder Julian Pearson said: “GPs that would never have approached us – alarmingly large GPs with successful brands – have come to us and said, ‘We’ve got eight people internally, we’ve got 500 LPs, but we are worried we are not going to get the numbers we want.’”

LPs are taking measures to increase their investment capacity. Los Angeles County Employees’ Retirement Association approved an increase in its private equity target allocation from 10 percent to 17 percent, while SWIB increased its own from 9 percent to 11 percent. Massachusetts Pension Reserves Investment Management Board and Illinois Municipal Retirement Fund were among the other LPs to raise their target allocations in 2021.

Others are using the secondaries market to free up capital for reinvestment. State Teachers Retirement System of Ohio and Harvard Management Company sold $1 billion-plus portfolios in 2021, while Florida Retirement System Trust Fund sold more than $2 billion. Last week, affiliate title Secondaries Investor reported (subscription or registration required) that California Public Employees’ Retirement System plans sell up to $6 billion of PE stakes in what would be the largest ever portfolio sale.

Pricing for buyout funds was around 92 percent of net asset value in the first half of last year, according to investment bank Greenhill. This has encouraged LPs to come to market with newer funds, which often sell for par or better as secondaries firms’ tolerance for risk increases.

“Funds with a lot of unfunded [schemes] used to be viewed as risk-negative,” said one London-based secondaries buyer. “Nowadays it’s risk-neutral or even positive.”

Although the capital crunch is likely to prevail for some time, it is clear that LPs’ appetite for PE investment remains. GPs would do well to remember this when the fundraising going gets tough in 2022.