Private Credit, PE are Planting a “Seed” — Evening Brief – 07.30.24
Private credit and private equity strategies are gaining momentum when it comes to seeding, but hedge funds continue to attract allocators’ interest, according to a study by law firm Seward & Kissel.
According to the report, Seed Transaction Deal Points, institutional seeders continue to account for a disproportionate number of observed transactions, resulting in a considerable increase in the observed median check size. While total activity remained consistent year after year in 2023, seed contributions were almost as likely to be made in illiquid or less-liquid techniques as in liquid products like hedge funds. This changing proportion continues a trend that began in 2022 and is particularly noteworthy given the previous overweight of seeding to hedge fund managers.
“Seed deals are still most prevalent in the hedge fund category, but extrapolating from recent trends, private equity/private credit seeding is well on its way to catching up,” said Seward & Kissel Business Transactions Group Partner Gary Anderson, the lead author of the study. “In fact, I would not be surprised to see closed-end fund seeding exceed hedge fund seeding in the coming years.”
The survey revealed that classic long/short equity strategies, particularly those focusing on certain industries or themes, continued to garner a sizable amount of total seed investments. Multi-strategy managers were in high demand among liquid strategies.
Furthermore, over 75% of transactions in 2023 featured working capital support, up from 64% in 2022, 59% in 2021, and 48% in 2018. Assistance with working capital is a vital facilitator for new managers in an environment where significant allocators are increasingly unwilling to invest in a new fund unless institutional-level competencies and infrastructure are in place, according to the study.
The survey discovered that seed investors, wary of the volatility observed in 2020, continue to demand protections in the form of narrower performance-related early lock-up release triggers. Deal parameters are increasingly aligned among seeders, managers, and third-party investors. This happens when seeders increasingly agree to structures that are more appealing to fund managers and non-seed investors. Managers have also earned breathing room as three-year lockups have become more common, accounting for half of 2023 seeding deals compared to only 10% in 2018.
“The ongoing trend towards greater alignment of seeders with managers and third-party investors is an excellent sign for the continued growth of seed transactions,” Anderson observed. “For example, recent SEC guidance and focus makes it increasingly imperative to match the seeder’s liquidity profile to that of other investors in the fund.”