Disruption in the cycles of raising capital, investing, and exiting in private equity has disrupted capital flow
Global private equity funding saw the lowest total since 2017 as it fell by 11.5 percent year-over year by aggregate value in 2023, according to data from Preqin Pro, as reported by S&P Global Market Intelligence. The decline came as there were 1,936 closed funds, which was the smallest annual number seen since 2015.
Fraser van Rensburg, managing partner at placement agent Asante Capital, said that liquidity was an issue that has resulted to the disruption of the cycle of raising capital, investing, and exiting. With macroeconomic conditions further contributing to the decrease in M&A and exits falling, the flow of capital back to limited partners (LPs) was consequently disrupted.
Factors that also contributed to the overall weak fundraising totals were the hoarding of ample capital that have already been raised and were awaiting investment as well as the overallocation to private equity by pension fund investors.
Ryan Schlitt, CEO and co-founder of placement agent Aviditi Advisors said that around 75 percent institutions all around the globe were currently at allocation.
In 2023, the top 10 fundraises accounted for $231 billion, which was 28 percent of the total global amount. In the previous year, the top 10 only accounted for 17.7 percent. The report said that this was an indicator that investors have fled to the familiar names, with seven of the top 10 being from large brand name private equity firms that were based in the US.
There was a significantly lower number of funds that launched in 2023 with the 2,284 in 2022 falling to only 952 products. This was the lowest number seen since 2013.
Karen Derr Gilbert, partner at FTV Capital, said that LPs have shown to be favouring midmarket funds because they were engaging in smaller deals, using less debt compared to large buyout funds, and investing in companies not relying on the IPO market. She further said that they can rely on strategic and financial sponsors as potential exit paths.
“[LPs] are looking for strategies where the general partner (GP) has a proven track record through multiple economic cycles and those are the kinds of GPs that are going to sort of top the list for both re-ups and for new commitments,” said Derr Gilbert.
With many expecting cutbacks on interest rates and the improvement of the public market sentiment, fundraising may possibly see a gradual rebound in 2024.
Schlitt said that as M&A activity is expected to pick up, it can lead to more distributions for LPs to invest in either existing or new managers. It will also mean that the public markets have rebounded from a denominator effect standpoint.
However, van Rensburg noted that while things were pointing to a more positive note, the improvements in private equity capital raising can only be seen in the second half of the year as there was usually a lag ranging from 12 to 18 months.
