PE fundraising outlook

July 2024  |  FEATURE | PRIVATE EQUITY

Financier Worldwide Magazine

July 2024 Issue

2023 was a difficult year for private equity (PE) fundraising. Anecdotal evidence of the industry’s struggles is supported by hard data.

Numerous reports, including Private Equity International’s (PEI’s) FY 2023 Fundraising Report, highlight the challenges experienced by firms. The number of funds that held final closes in 2023 reached its lowest level for six years, according to PEI.

In total, 1757 funds held final closes last year, with fundraising falling for the second consecutive year. 2023 saw $784.93bn raised, down 4.6 percent from $822.58bn raised in 2022 and 9.6 percent from 2021. Mega funds accounted for the lion’s share, with the 10 largest closes collecting around $200bn between them, up 21 percent on 2022.

Preqin data tells a similar story. It found that in 2023 global PE fundraising fell 11.5 percent year over year by aggregate value, to its lowest total since 2017. The number of funds closed, at 1936,  was the smallest annual total since at least 2015.

Meanwhile, the capital being committed is coming in at a slower pace than usual. The average time to close a fund has increased to 16.8 months, up from 14.5 months in 2023 and just 11 months in 2022. This slowdown is also affecting mega funds – of the 10 largest open funds, nine entered the market before 2023.

Constraints

A number of factors are behind the drop in PE fundraising. Macroeconomic conditions certainly contributed, constraining acquisition activity. In a higher interest rate environment, general partners (GPs) have found it hard to source attractive deals, leaving them sitting on $4 trillion worth of dry powder.

According to Pitchbook, 2023 was the first year that PE lost share of the global M&A market both in terms of deal value and deal count. This followed eight consecutive years of buyouts gaining share of total M&A, rising from 21.8 percent to 36.1 percent of deal count, and an even higher share of deal value.

This all changed in 2023, with the setback in deal value especially pronounced. It fell to 39.9 percent from 44.0 percent the prior year. This sets up a scenario in which PE may be left out of a cyclical rebound in M&A activity due to a declining participation rate.

In Europe, PE dealmaking declined in the first three months of 2024 as investors largely eschewed mega deals in favour of smaller, add-ons transactions, according to Pitchbook. Overall deal value declined 37.2 percent from Q4 and 19.6 percent year over year.

PE exit activity has also been rather lacklustre. This, in turn has disrupted the flow of capital back to limited partners (LPs), impacting  how and when they can commit to new funds.

However, growth equity deals are soaring since they involve little leverage and smaller cheque sizes. Greater exit momentum in this part of the market may help boost fundraising.

Outliers

Despite the broader headwinds, Europe managed to buck the trend. In fact, 2023 was nearly a record year for PE fundraising in Europe in terms of capital raised, which reached almost €120bn, according to Pitchbook. That total was achieved across 117 funds – the lowest number of new funds in over a decade.

Pitchbook also reports that in Q1 2024, the region had a record quarter for fundraising. Activity was boosted by a number of final closes for mega funds, including EQT’s 10th flagship vehicle raising $23.36bn, which accounted for more than a third of all European PE capital raised in the quarter.

On the whole, established funds prospered in the first quarter of the year, as institutional LPs concentrated their PE exposure with larger, less volatile vehicles. Should this activity continue, the $76.8bn raised in Q1 would position 2024’s fundraising total as an exact match to last year, with the two being tied as the second-highest totals in history.

A good portion of the committed funds went to three mega funds (BDT & Company, TPG and TJC), which closed on a combined $32.9bn, accounting for 42.8 percent of the quarter’s total. Middle-market funds – those raising between $100m and $5bn – attracted $43.5bn, 56.7 percent of the total and substantially less than their five-year quarterly average of 62.9 percent.

Buyout funds accounted for the largest share of funding, with 90.3 percent of all funds raised in Q1 flowing into them. The proportion of growth equity funds plummeted by more than half, from 20.2 percent in 2023 to 9.7 percent.

In April, Blackstone announced that it had enjoyed its best quarter for individual investor fundraising in nearly two years. According to the firm, sales into the wealth channel in the first quarter of 2024 stood at $8bn, as subscriptions increased 83 percent from the previous quarter across Blackstone’s three large scale perpetual vehicles BREIT, BCRED and the newly launched PE fund BXPE.

Positive signs

Despite uncertainty in the fundraising space, there are reasons to be cautiously optimistic. Signs indicate a potential rebound in the second half of 2024. Persistently high interest rates, which have caused disruption in recent years, are now falling, though perhaps not at the speed many had hoped. If M&A activity increases in the coming months, this could translate into more distributions for LPs to invest with existing or new GPs.

The past five years have been among the toughest for PE fundraising since the financial crisis of the late 2000s. Yet the outlook does appear brighter than at any point since the onset of the coronavirus (COVD-19) pandemic. Green shoots of recovery could be pushing through.

© Financier Worldwide

BY

Richard Summerfield