As we start the New Year, we look ahead at trends we expect to see in the private fundraising space.
According to data from Preqin in November 2022, global private equity fundraising has decelerated to its slowest pace in 20 years. In Europe, the slowdown was most prominent in H2 2022 where, except for one Nordic sponsor, the rest of the region’s largest 15 private equity fund closes occurred before the summer.
Looking forward into 2023, GPs are hopeful that renewed LP allocations will restart their fund closings in Q1, but the competition for LP airtime remains high and there continues to be an oversupply of managers chasing capital in the market. The denominator effect caused by the public market volatility is also affecting LP commitment sizes and forcing GPs to pursue new pockets of capital in the form of private wealth clients, retail investors and family offices.
However, accessing these alternative pools is not without its legal, tax and regulatory complexities and GPs will need to spend time and resources on working through structuring and operational issues and it remains to be seen how much might be raised from these sources in practice. Despite the fundraising slowdown, to date headline management fee / carry rates have remained relatively stable, although behind the scenes larger investors are certainly negotiating much greater discounts than has been seen in recent years. GPs may find it necessary to be more flexible depending on how the economic and geopolitical environment progresses.
Two trends which seem certain to continue in 2023 are GPs seeking to extend their fundraisings beyond the typical 12-month period and a continued LP focus on ESG-related matters. From an LP perspective, with the fundraising environment being at its slowest in several years, we expect more caution and less of an appetite for risk in the form of prioritising existing GP relationships over new entrants to the market.
Greater scrutiny from LPs over fund terms, which have been trending towards GP-favourable positions in recent years, is inevitable, with larger, anchor investors being able to leverage their position to gain ground on key negotiation points, particularly on bilateral, ‘side letter’ undertakings. Opportunistic investments, whether on a direct or co-investment basis, will continue to have their place in a more distressed market for the larger LPs that still have the mandate to execute them. Consequently, GPs will need to continue to think about innovative structuring options to accommodate them.
With many GPs turning to access funds and feeder structures set up by third party intermediaries to provide private market access to high net worth and private wealth clients and increasing efforts from regulators and market participants to broaden access to retail investors (though several hurdles remain in this respect), the widening of the traditional institutional investor base is another trend to watch in 2023.
After the record growth in global GP-led secondaries volume in 2021, the GP-led market slowed during 2022 as buyers became more cautious and selective, with single-asset continuation vehicles involving trophy assets becoming the predominant type. While the volume of GP-led secondaries remained strong in 2022 and generally matched 2021’s record level of approx. $130 billion, the second half of 2022 marked the resurgence of LP fund portfolio deals. Mainly driven by the denominator effect and slowdown in fund distributions, LP portfolio deals have proven to be an efficient tool for LPs looking to rebalance their over-allocations to private equity. In particular, large sales of fund portfolios by LPs (also known as “mosaic sales”) have abounded on the market, where strips of fund interests were split amongst multiple buyers.
For further views about what we think lies ahead over the coming months – as well as a snapshot of our highlights from 2022 – please click here.
Despite the ongoing uncertainty in the market, 2022 was another busy year for Ropes & Gray in London. As the pre-eminent international law firm for private capital, we helped our international client base complete deals in challenging conditions across the private capital markets. These included cross border buyouts, M&A, P2Ps, bolt-ons, new financings and refinancings, and minority investments with significant activity across the healthcare, life sciences and TMT sectors in particular.