Evening Brief – 11.08.23
Creativity is Key
GPs are having to turn to increasingly creative capital raising options as economic headwinds continue to put pressure on the private equity fund market, according to findings from a new report from law firm Dechert.
Private equity firms have been negatively impacted by a slowdown in the capital raising market, with the total raised by closed funds in the US down 12.9% in the first nine months of this year compared to the same time in 2022, PitchBook data showed.
The average duration to attain a final close for a private equity fund is 19 months, which is near the top of its historical average and up from 15 months in 2019, according to Preqin data.
The current environment is forcing GPs to raise additional capital through annex funds, or sidecar vehicles, or to use alternative liquidity solutions such as GP-led secondaries and continuation vehicles, cited Dechert in its sixth annual Global Private Equity report.
Despite some good fundraising periods, sentiment has been changing in favor of larger firms for many years, with LPs putting their commitments into the largest vehicles with the strongest, longest track records.
According to Dechert, a more recent phenomenon – the liquidity shortage caused by decreased exit volumes – means LPs are becoming even more picky in their commitment decisions, particularly in the present high inflation, high interest rate environment.
Although inflation figures are heading in the right direction, there is still a significant degree of macroeconomic uncertainty, which means there is perhaps more incentive than ever for investors to be cautious about which managers they are willing to back.
Large-cap, multi-strategy asset management firms continue to be the biggest winners amid this concentration of capital, the report added.
Sabina Comis, Dechert’s global managing partner, said, “In the challenged market conditions that we’re in right now, LP committee members are going to naturally be inclined to commit to larger well-established funds.
“The big pension funds in particular also want to write large tickets and only have so much resource to conduct due diligence on the universe of thousands of PE funds, so there’s a capital efficiency element there as well.”
Dechert’s survey of senior executives within PE firms in the UK and EMEA, North America, and APAC revealed the biggest challenge they currently face in replenishing their dry powder is competing against the largest and most diversified GPs, cited by 21% overall.
In terms of dealmaking, global PE volume fell 28% year on year to 6,300 deals in the first three quarters of the year. Meanwhile, total transaction value has plummeted by 45% compared to the first three quarters in 2022, to $448 billion.
“While this drop in aggregate value has been more precipitous than the decline in volume, and reflects markedly tighter debt financing conditions, the market has essentially recalibrated to its pre-pandemic baseline following a frenetic couple of years,” said Dechert.