Private equity investors struggle to raise money with investors. But this hasn’t yet led to lower fees for limited partners (LPs) such as pension funds.
According to data provider Preqin, only slightly more than 800 private equity funds managed to close in 2022. This is the lowest level since 2013. Assets raised with investors also fell to just over $400bn, a level last seen in 2014.
The number of months a private equity fund is in the market to raise money has, according to Preqin, also increased dramatically to 21 months, up from 13 months in 2019. First-time managers especially are struggling. First-time funds that closed in 2022 took on average 28 months to get there.
“It is an interesting time to be in the market for fundraising now,” said Iyobosa Adeghe of London-based private-equity firm Coller Capital, speaking at the 0100 Conference for private equity and venture capital in Amsterdam this week.
“Many pension funds now have allocations to alternatives that exceed their limits, and conversations are now taking longer than expected,” he added.
“It’s tough out there to raise money,” Nick Palairet, head of fundraising at Cobera Private Equity, chimed in. Speaking on the same panel, he said: “The fundraising time has come down a lot in the last 15 years, but now it’s going up.”
The competition among managers for funds has increased, and the money that is being committed tends to go to the bigger, better-known managers. “That just makes it more difficult for us to raise money,” noted Palairet.
It’s not just the uncertain macroeconomic environment that is making fundraising more complicated. “It is becoming structurally more challenging because historically a lot of private equity investments have come from investors who were building their allocations. They tend to have reached their target exposures now,” said Reji Vettasseri of Swiss asset manager Decalia.
Yolande van den Dungen, a portfolio manager at Dutch pension fund Rail & OV, agreed. “We have a lower budget for new investments now because our allocation to private equity has risen because of the denominator effect,” she said, referring to the fact that public markets have so far corrected more strongly than private markets, leading to an increase in allocation to private market investments.
Fees
So does the changed fundraising environment give LPs such as pension funds a stronger position on the bargaining table? Marco Natoli of the European Investment Fund, a semi-public institution that invests in small companies, said it is at least easier to get a seat on the table.
“There was a fear of missing out as fundraisings were completed very quickly. Now it’s more of a buyer’s market, and it’s easier to invest,” he said.
But when it comes to fees, not much has changed, according to Van den Dungen. “We have been hoping for more LP power but GPs are still able to set the terms, in our experience,” she said.
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