Five ways GPs are working to stay ahead in a competitive market

Increasing portfolio diversity is just one approach GPs are taking to reverse last year's decrease in funding.

With inflation, high interest rates, and geopolitical and macroeconomic uncertainty buffeting the private equity industry over the last year, it's perhaps unsurprising that global fundraising dropped from a record $829 .8 billion in 2021 to around $727.6 billion in 2022.

While the fall in volume is not as dramatic as one might have expected - last year's total was still higher than that of 2017, 2018 and 2020, according to Private Equity International data - there was a more significant decline in the number of funds that closed. Just 1,520 private equity funds closed in 2022, per PEI data, down from 2,278 in 2021 and representing the lowest number since 2016.

As some LPs grapple with the denominator effect and capacity constraints, they have had to be more selective in the number of funds they back, and how much they commit. This might include concentrating on the big-name funds and GPs that investors already have an established relationship with, or perhaps seeking upside through differentiated strategies or exposure to the mid-to-lower mid-market. "You have LPs that maybe were writing a $50 million cheque to an upper middle-market fund - now they're going to a middle-market or lower middle-market [fund] to blend down their fees or take advantage of the slower fundraising market," Matt Swain, global chief executive at placement agent and advisory firm Triago, told PEI earlier this year.

With many GPs finding it harder to raise capital in today's environment, we look at some of the ways they are building on elements that differentiate them from their peers.

Deepening domain expertise

As businesses in a range of sectors face more challenging operating conditions, being able to tap into the industry expertise of their PE owners is becoming increasingly valuable. Whether it's through in-house sector-focused investment and operating professionals or a network of trusted advisers, having the know-how to navigate uncertainty and identify opportunities for growth is particularly important as the rising cost of debt further shifts the emphasis from financial to operational growth levers.

"Loading up on debt is not going to work in the years ahead," says Christian Hess, European head of the financial sponsors group at investment bank Piper Sandler. "GPs have to be prepared to hold assets for longer and have the conviction that they can drive earnings and value in multiple ways. Firms with a sector thesis and ecosystem will be the best placed to do that."

Building a brand and marketing strategy

Managers may have a clear idea of what their competitive advantage is, but how are they getting that message across to prospective LPs? According to a recent survey by communications agency Prosek Partners, more than two­thirds of GPs are using social media platforms such as Linkedln as a marketing and branding tool.

"Many GPs have taken to social media as a way to elevate their brand, to increase awareness of their specialised capabilities and to elevate the profile of their key leadership," says founder and managing partner Jennifer Prosek.

While GPs must keep regulatory considerations in mind when marketing via social media, particularly during fundraising, such platforms can provide opportunities to identify and engage with LPs. "Given how highly competitive the fundraising market is today, you need to have a high-quality digital presence because that is your shop window," says Triton Partners communications director AlexJones. "You need to share the right information in a way that is effective and engaging, in order to persuade LPs to come inside that shop."

Unlocking new investor channels

GPs might have their work cut out attracting sizeable cheques from their traditional investor base, many of which have spent the last year addressing overallocation issues, but there are new pools of capital to tap into. Tech advances are proving to be a key element of the ongoing democratisation of private markets. Digital platforms, analytics tools and blockchain are among the technologies improving retail, high-net-worth and the wealth management market's access to the asset class, while also streamlining processes.

There are still some wrinkles to iron out, however. James Windsor, a senior vice-president at Campbell Lutyens, says: "We are seeing a lot more interest in these tools among the managers we work with, particularly given the wider market slowdown in fundraising. People are looking for new potential sources of capital, but it is a steep learning curve to make new channels work at scale."

Widening the talent pool

According to PEI's LP Perspectives 2023 Study, around eight in 10 investors scrutinise diversity and inclusion at the GP level to some extent during manager due diligence. Today, a growing proportion of GPs are putting strategies in place to increase diversity within their own organisations and within their portfolios, cognisant that a more diverse and inclusive workforce can lead to better outcomes and more closely align with investors' values.

Thus far, diversity, equity and inclusion programmes in private markets have largely focused on gender and, to a lesser extent, racial equity, but Tracy Ma, founding partner and chief operating officer at Hillhouse, notes that

"components of diversity beyond gender and race are an increasing focus for LPs".

Some managers have likewise broadened the scope of their DE&I efforts to encompass areas like socioeconomic diversity. Blackstone, for example, has put in place initiatives such as Career Pathways, which aims to drive economic mobility for historically underrepresented talent and support diversity within its portfolio.

Targeting regional opportunities

Funds might also seek to stand out from the crowd by targeting overlooked opportunities in specific geographies. "Competition in private equity has become fiercer over the past few years, and one way some GPs are looking to differentiate themselves is by looking to underpenetrated markets, such as tier­two cities, where there is more limited competition for deals," says StepStone partner Natalie Walker, who highlights the proliferation of regional funds in the US, focusing on areas such as the Midwest and Pacific Northwest.

This trend could help meet demand from those LPs with an appetite for local investing. While this approach has typically been the preserve of US pension funds, some of which have established in-state PE programmes, it is now gaining traction among some other types of investors and in other locations. In the UK, for instance, place-based investing has begun to gather momentum, and not just among local government pension schemes.

Sarah Teacher, interim joint chief executive of the Impact Investing Institute, says that LPs interested in this space "tend to be investors that are rooted in a particular place, such as charitable foundations, or wealthy families that come from a certain area. They are looking to drive outcomes in a particular location and are using geography as part of their impact lens."