With private equity raising in the first half of 2022 slowing down, Ropes & Gray partners Debra Lussier, Laurel FitzPatrick and Brian Hankele and I, in this article, reviewed the drivers of this slowdown and how sponsors and investors change their strategies in light of changing market dynamics.
According to International private companyIn the Fundraising Report for the first half of 2022, global wealth managers by private equity asset class raised $337 billion in the first half of 2022, down 27% from the first half of 2021. What caused this reduction?
Denominator effect. As public stocks drop throughout the year, some investors are finding their portfolios reallocated to private equity. This forced investors to pause and rethink their deployment plans.
Record amounts raised by blue chip managers. The large number of big funds closed this year, including blue-chip managers Advent International, KKR and The Carlyle Group, means LP’s 2022 allocations are already stretched out.
Reduction of yields caused a slowdown in distribution from managers, leaving LP with less money to reallocate for new investments.
As a result of this reduction in LP capital, investors are leaning towards larger and more established managers. Funds targeting $5 billion or more accounted for 58% of the capital raised in the U.S. private equity buyout market in the first half of 2022, according to Pitchbook. bring to market innovative and flexible fundraising structures to support investors.
The change in risk outlook and the impact of higher interest rates are also shaping the fundraising landscape in terms of strategy. Anecdotal evidence suggests that investor interest in strategies that are considered more stable, such as private loans, infrastructure and real estate, is growing in the face of inflation. Bad debt is another new strategy.
Managers are also adjusting to work with larger LP groups to fill ever larger funds and growing investor demand for more customized reporting. The development of new relationships and the attraction of new LPs to the fund contribute to the increase in fundraising terms and complicate negotiations, and the inclusion of additional letters is becoming more common.
After all, the appetite for private capital remains strong and managers are still getting funded, even if it takes longer than previous fundraising cycles. The window for new commitments may open again next year.
“This is an interesting time for records. The denominator effect is on the radar. Some LPs have been reallocated but are still very positive about the new PE commitments. Investors don’t want to sit on the sidelines. They recognize that they need to find capital in terms of profits and relationships. Some LPs are even considering selling old positions through the secondary market to provide liquidity for new commitments.”