Fundraising, Succession Remain Top Priorities — Evening Brief – 08.06.24
Fundraising remains the top priority for managers, with 40% of GPs citing it as the most critical issue in 2024, up from 24% in 2023, according to a report by New York-based law firm Barnes & Thornburg. The research comes at a time when the private funds market is becoming more difficult to forecast and costs on all sides of the transaction are rising, the firm noted.
Approximately 33% of the 138 GP/LP respondents identified fundraising periods, investment periods, and fund terms as their top developments over the past 12 months. The percentage of individuals choosing fundraising and term extensions increased by over 10 points.
Barnes and Thornburg observed that LPs tend to invest with larger and more well-known GPs. According to a McKinsey survey, the 25 most successful fundraisers received 41% of commitments to closed-end funds. According to the survey, 78% of respondents have seen an increase in fund consolidation in the past year, primarily due to increased competition, diversification, market volatility, and fundraising issues.
When it comes to liquidity, secondaries are meeting a critical demand for LPs. The largest percentage (41%) believe the secondaries market will be “slightly” stronger over the next 12 months, while 10% expect it to be “significantly” stronger and another 24% expect it to be “moderately” stronger. Secondary sales are an excellent chance for investors with longer liquidity horizons to purchase fund interests at a discount.
Barnes & Thornburg also noted that LPs are worried about succession planning, as well as returns and liquidity. Rising fund operating costs could be a major reason why GPs are failing to meet LPs’ succession planning expectations.
GPs are hesitant to remove legacy funds as cost demands increase. Only 38% of managers have a leadership succession strategy in place, although 96% of LPs would prefer that their portfolio managers have one. In addition, twice as many managers as last year (15%) indicated they are not even thinking about transition issues right now.
“Both LPs and GPs acknowledge that the costs of launching and operating a private fund have steadily increased, with the legal costs associated with fundraising and compliance being a key component,” said Scott Beal, a partner and co-chair of Barnes & Thornburg’s Private Funds and Asset Management practice.
Investors who saw increases in fund organizational expenditures totaled 36%, up from 19% in 2023. Respondents foresee more of the same over the next 12 months, with rises in spending, additional extensions, and changes in GP capital commitments. Key-person provisions are one of the terms that are projected to become increasingly common as LPs gain more leverage.
LPs are also pushing for higher returns, with 54% of investors stating that it was the most significant issue this year, while 50% of LPs were concerned about financing arrangements (up from 23% the previous year).
The study also looks into some of today’s most popular topics, such as artificial intelligence (AI), cryptocurrencies, private credit, and new regulatory challenges.