Understanding Fundraising Dynamics in Private Markets

Fundraising continues to be a challenge for private equity funds. As reported by Private Equity International, many LPs are overallocated to private equity and have been experiencing lower than usual distributions. As PEI noted, “even the biggest brand-name GPs are tying themselves in knots to convince their LPs to invest.” This tightening of the fundraising market has driven some sponsors to consider fundraising from HNW (High New Worth) individuals (see the meme!). As KKR noted on an earnings call this week, fundraising from HNWs and family offices has continued to accelerate and is an important part of the firm’s fundraising strategy. Sourcing capital from HNWs has a number of implications for a #fundfinance facility. The foremost concern in a capital call/subscription credit facility is the credit quality of these HNWs. While an endowment or pension fund can generally be relied on to comply with their obligation to fund capital contributions, individual investors are a different story. HNWs may miss a deadline for a capital contribution because they are sick or on vacation. They may have an urgent financial need that could negatively impact their ability to fund capital. And they are more likely to throw in the towel on a fund and walk away if the fund is performing poorly. #Fundfinance bankers have a number of levers to address these credit concerns. The first route is to apply a lower advance rate to the unfunded capital commitments of these investors, usually around 50%, thereby decreasing the likelihood that the lender will get burned even if a number of investors fail to fund. Another route is to tighten the “exclusion events” applicable to these investors, i.e., the events that result in their removal from the borrowing base. Typical exclusion events are the bankruptcy of an investor, the failure of an investor to fund on time, any communication from the investor regarding an intent not to honor its capital commitment, and sometimes any material adverse effect related to that investor. Another route for #fundfinance bankers to consider are concentration limits.  Concentration limits restrict the percentage composition of any single investor in the borrowing base. By setting the concentration limit low, say 5% or 10%, a lender can ensure that there are many different investors making up the borrowing base and thereby limit their risk. Another powerful lever is to require that a certain percentage of the investor’s capital commitment be funded (usually 10% to 20%) before the fund can borrow on the line. This technique relies on the “sunk cost effect” – which is a tendency to continue on a course of action once an investment in money, effort, or time has been made. Investors who have skin in the game with the fund are likely to stay the course and continue feeding in capital contributions even if the fund’s performance is poor because they have already invested significant funds.

As private equity investors increasingly delay the return of capital to Limited Partners (LPs), a new cycle is taking shape. This trend is causing LPs to allocate less capital to fresh private equity ventures. This shift particularly impacts fundraising efforts for both established and emerging managers. Emerging managers feel this more acutely, as their allocations from LPs are often seen as less critical. This evolving landscape may prompt a reevaluation of the industry's standard investment and harvesting timelines. The conventional private equity model of a five-year investment followed by a five-year harvesting period is being challenged. Now, we might see a new norm: five years of investing coupled with a ten-year harvesting phase. This adjustment could have significant repercussions for the fundraising market and investment strategies. Instead of the usual rapid turnover of assets, we might witness asset exchanges occurring perhaps only once every decade. Such an extended holding period for investments implies major shifts in the operational strategies of private equity funds. This includes modifications in value creation approaches, exit planning, and portfolio management. Moreover, it may affect the nature of investments pursued, with a possible inclination towards assets that offer sustainable value over these lengthier timeframes.

From 2011 to 2021, private equity (PE) funds generated 11 consecutive years of net distributions to limited partners (LPs). This meant that institutions could count on distributions offsetting commitments. In 2022, PE exits slowed down dramatically and continue to stall as of the time of writing this post. Exit activity is the most important link in the PE chain of capital formation. It is an overall indicator of the financial health of the PE market. Exits fuel fundraising. This leads to increased dry powder and the investment of capital. Furthermore, exits impact the allocation and reallocation of capital across institutions. In Q3 2023, exit value fell 40.7% from the prior quarter to its lowest quarterly level since the global financial crisis. It is now down 83.7% from the Q2 2021 peak. As of March 2024, PE valuations of U.S. dental support organizations (DSOs) pursuing a roll-up strategy involving the acquisition of multiple practices have reset from the higher valuations of 2021. Private equity fundraising is also down substantially from the peak of 2021. Investors may need to prepare for the possibility of a down round in 2024. DSO operators should look to improve the effectiveness of their organization’s revenue cycle management (RCM) function with the goal of demonstrating to LPs that they are a responsible steward of capital. For PE funds already invested in a DSO, there has never been a more important time to boost cash or more precisely, distributed to paid-in capital (DPI). DPI is the ratio of money distributed to LPs by a PE fund, relative to contributions. Any recallable distributions should be included in the numerator of this ratio. Any reinvested capital resulting from recallable distributions should be included in the denominator. DPI portrays the real profits to date earned by the PE fund’s LPs. Unlike the total value to paid-in capital (TVPI), the DPI is not inclusive of any residual fund value (i.e. the “paper gains” from investments not yet realized). DPI takes precedence over the TVPI as the fund’s life cycle reaches its later stages and the percentage of committed but uncalled capital remaining is close to zero. Sources: Franklin Templeton; PitchBook 🔔 This post is for information purposes only. Follow me for unique insights and in-depth financial analysis of the healthcare private equity market. #SinaAmiri #privateequity #investmentbanking #mergersandacquisitions #healthcare

As we assess the PE landscape, the scarcity of PE-backed exits in the last 18 months is poised to influence fundraising efforts in 2024. The absence of robust exit activity disrupts the closed-end fund flywheel, impacting capital circulation and LP commitments to new funds. Despite GPs' creative efforts with secondaries, continuation funds, and NAV loans, buyout fund distributions through Q1 2023 hit their lowest point since the Global Financial Crisis. At just 14.6% of the beginning NAV, well below the long-term average of 26.5%, the challenges are evident. Forecast models signal a potential 30% dip below the linear trend for buyout fundraising in 2024, marking the slowest pace since 2019. Macro-environment uncertainties add complexity, with the Fed's actions likely holding significant sway. Stay tuned for evolving dynamics in PE fundraising, where adaptability and macroeconomic shifts will play pivotal roles. #familyoffice #privatequity #capital #fundraising

Probably time to call a placement agent for guidance, as private equity’s fundraising slump deepened in the second quarter, with tighter financial conditions making investors reluctant and unable to commit more money to the private capital markets. Private-equity firms globally raised $106.7 billion in the three months ended June 30, down 35% from the same period last year, according to research firm Preqin. Firms closed 166 funds during the period, a 53% decline. The amount raised is the industry’s lowest quarterly total since the second quarter of 2018. Even during the economic freeze-up and Covid lockdowns of 2020, private-equity firms had higher quarterly hauls, Preqin’s data show. The slump likely will continue for some time as many institutional investors that are a key source of limited partner capital for private-equity funds are handcuffed from investing more without adequate distributions from their current private capital market investments, having already bumped up against their limits for investing in the asset class.  This is somewhat of a self-imposed issue by the private capital market participants as slow asset sales over the past year by sponsors, whether by the primary or secondary market, have left many limited partner investors with limited capital to make new fund commitments. The industry’s slowdown began roughly when the Federal Reserve started raising interest rates in March 2022.   The fundraising slowdown this year has hurt smaller and less experienced investment firms most, as many institutions concentrate their reduced investment budgets with long-term relationships rather than adding new managers. Even the illiquid private capital markets need liquidity to unleash the contribution cycle by limited partners into commitments to new funds being raised by sponsors. So sponsors as an industry should pull out the stops to drive distributions back to the limited partners, whether via minority, majority sale to third parties, or via aggressive use of the secondary market via GP-led solutions, such as GP-led tender offers, GP-led strip sales, among others. https://lnkd.in/g9-HDa-G #privatemarkets #privatecapital #privatefunds #privateequityfirms #privateequityfunding #growthcapital #venturecapital #venturefunding #institutionalinvestor #secondaries #secondarymarket #tender #limitedpartners #gp #lp #liquidity #mergersandacquisitions

10 takeaways from Apollo Global Management, Inc.'s 105-page report on private markets 1. Private markets are still small, comparatively With growth of $8 trillion over the past 10 years, private capital AUM growth is still far below public markets and bank balance sheets, with global equity market cap growth at $35T, bank balance sheet growth at $34T and global fixed income market growth at $42T over the same period. 2. Capital is concentrating in the hands of the 10 largest firms Across all private market segments, the largest 10 funds increased their share of capital raised. Within infrastructure, for example, the share that the largest 10 represented rose from around 30% to over 60% between 2022-May 2023 and the compared period of 2018-2021. 3. Private capital fundraising had a bad 2023 Across all but one private market strategies, 2023 represented a decline in capital raised from 2021 and 2022. The exception was secondaries which rose in 2023, though fund count fell. 4. North America increased its share of capital raised North America continued its dominance of the fundraising landscape, reflecting the depth of its manager and LP ecosystem. 5. The exit-to-investment ratio continues to decline The ratio has fallen relatively consistently from a high of around 0.55x in 2013 to 0.37x in 2023. Without distributions, re-ups are less viable for LPs. 6. As the number of PE-backed companies rises, median entry multiples also rise reflecting competition The exception was the mid-market, where multiples fell in Europe and North America to 11.4x EV / EBITDA, from a high of 14.3x in 2019. 7. Over 80% of private debt fundraising in 2023 was for funds with sizes over $1B, compared to less than 50% in 2009 8. Direct lending continues to be the dominant credit strategy, by capital raised Among the strategies that experienced the most significant declines from 2021-2023 were distressed debt, special situations and bridge financing. 9. Oil and gas fundraising has bounced back from historic lows in 2021-2022 Oil and gas represented close to 20% of all capital raised in real assets, up from sub-5% levels in 2021 and 2022 10. PE megafunds have the largest share of dry powder they’ve ever had, approaching $500B in 2023 Link below: https://lnkd.in/efuMVjk4 #privateequity #privatedebt #fundraising #capitalraising #ir #privatemarkets