Private-Equity Fundraising Blues Weigh Heavily on Newer Managers

Since the private-equity fundraising slowdown began last year, these dynamics have intensified, with newer managers getting a significantly smaller piece of the overall fundraising pie than usual.
Since the private-equity fundraising slowdown began last year, these dynamics have intensified, with newer managers getting a significantly smaller piece of the overall fundraising pie than usual.

Summary

  • Investment firms with short track records bear the brunt of an industrywide slowdown, new research shows

A pullback by private-equity investors is hitting younger firms harder than their longer-tenured peers.

Raising money has always been hard for fund managers with shorter track records, especially as investors have migrated toward larger managers in recent years.

But since the private-equity fundraising slowdown began last year, these dynamics have intensified, with newer managers getting a significantly smaller piece of the overall fundraising pie than usual.

So-called emerging managers, or those that have raised three or fewer funds, account for about 17% of the total money collected by the industry since the beginning of last year, according to PitchBook Data, which tracks information about private markets. Such relatively new firms gathered around 31% of the total capital raised from 2008 through 2021.

For the very newest firms, those putting together debut funds, the market is even less welcoming. First-time funds closed on $2.9 billion in this year’s first quarter, well behind last year’s pace, when debut managers raised $16.4 billion for the full year, PitchBook said. Even last year’s total paled by historical standards. In 2016, for instance, inaugural funds closed on more than $80 billion.

The problem is that institutional investors lack new money to invest, because the slowdown in liquidity events such as mergers and initial public offerings has reduced their cash flow, said Brenda Rainey, a member of the private-equity practice at industry consulting firm Bain & Co. At the same time, there is a huge number of firms trying to raise capital, resulting in a very competitive market.

“Arguably [fundraising] is the most difficult challenge that firms are facing today, even more so than deal-making," said Rainey. “We have not seen such an imbalance between supply and demand since the financial crisis."

Some investors still want to provide seed capital to newer managers, but their budgets are simply too stretched, she said. “The interest has not gone away for emerging managers. It’s just the squeeze that investors are in now," Rainey said. “The reality is that there are just fewer dollars to go into new commitments."

While conditions are worse for new managers, few firms escaped the pinch of the broad decline in fundraising that began last year and continued in the first months of 2023, PitchBook data show. All private-capital vehicles—including private equity, venture capital, real estate and other types of strategies—collected about $1.09 trillion globally in the past four quarters, 29% less than during the previous four quarters, PitchBook said.

So-called private-equity megafunds—huge vehicles managed by established private-equity firms—have also struggled to get commitments from investors. They accounted for about 30% of the total raised for private-equity funds in the first quarter, below their 46% share last year. The largest buyout fund to close during the quarter, London-based Permira’s eighth flagship buyout vehicle, gathered €16.7 billion, or about $17.8 billion.

Globally, private-equity firms collected $455 billion for their funds in the past four quarters, about 16% less than during the previous 12 months, PitchBook said.

Other types of private funds had steeper fundraising declines. Venture-capital fundraising fell to $202 billion over the 12 months through March, down 38% from the year-earlier period, and real-estate fundraising dropped 42% to $92 billion on the same basis.

Only secondaries fundraising increased over the 12 months endedin March, with $62.4 billion raised in that time, an increase of nearly 40%.

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