Private funds in 2022 – A look ahead

As 2022 gets underway we wanted to look ahead at the areas where we, as private funds lawyers, are expecting significant activity from both GPs and LPs.

Whilst the world faces the sustained effects of COVID-19, the alternatives market remains resilient and continues to enjoy favourable fundraising conditions across asset classes despite political, societal, tax and regulatory challenges and uncertainty. We expect these conditions to continue in 2022 and, with a number of blue-chip names due to launch new vintages of their flagship products, the sector is poised for record fundraising figures.

In addition to big-name fundraises, we anticipate a steady flow of new alternatives product launches from both first-time sponsors and platform expansions by household names. Although it has been more challenging and time-intensive for emerging managers and new strategies to raise capital in the virtual due diligence environment, we believe that the market is gradually adapting and are hopeful that building new investment relationships virtually is becoming more achievable for GPs and LPs alike.

When considering strategy popularity, as in 2021 we predict high demand for funds in the technology, logistics, healthcare and renewable energy sectors, with the themes of impact and sustainability also ongoing as key focus areas. We think that GPs will continue to look at alternative strategies (such as small-cap, growth and special/tactical opportunities vehicles) including a broader size ranges of funds to accommodate these.

The continued proliferation of credit fund products is also expected, with an emphasis on distressed, special opportunity and credit solution strategies, poised to take advantage of any downturn in the market. With so much choice for LPs and the unprecedented amount of dry powder in the market we expect one of the biggest fundraising challenges for GPs will be to convince LPs that their capital will be put to work quickly and that the intensified competition for assets will not overly impact returns.

From an LP perspective we anticipate further increases in LP desire for greater transparency and control over the direction of fund portfolio companies resulting in more fund-level reporting and investor interaction requirements for GPs. At the same time, LPs continue to be focused on co‑investment and direct/strategic opportunities sourced by their GPs and invested outside of the funds they are invested in. We saw an uptick in these transactions in H2 of 2021 and along with club deals and joint ventures expect them to remain prevalent in 2022.

The global focus on sustainable and ESG-driven investment will also continue to drive activity this year and beyond. Post COP26, private fund sponsors have a renewed mandate to act as agents of change with regards to ESG and climate matters and they are supported in this by LP demand. Whilst Europe continued to lead the field in 2021 with legislation such as SFDR and the Taxonomy Regulation coming into force, in the US - fueled by the Biden administration - the SEC is ramping up efforts to enforce ESG disclosures and we predict further progress in 2022.

Outside of primary fundraisings we saw record numbers of secondary transactions in 2021, with GPs particularly favouring single-asset continuation funds although we note that in the second half of 2021 a large number of LP portfolio transactions also successfully entered the market. We expect these high levels of secondaries activity to persist as the pandemic disrupts exit timeframes, impacts global economies and secondary-focused funds continue to raise record amounts of capital.

Finally, we anticipate the volume of GP-stake investment activity to continue in 2022 as sponsors seize these liquidity opportunities to fund platform expansions and enable founders to monetise their interests. Whilst historically these deals have been more common in the US, over the course of 2021 we have also seen significant GP-stake deals in Europe and expect a further wave of European GPs to consider these in 2022.