With $1.2tn of dry powder available to private equity managers at the end of 2021 (26.3% of total private equity AUM), and the impact of inflation delaying LPs’ allocations to the asset class while they re-balance their portfolios, we see a tougher environment for GPs to operate in. Below, we look at the top three challenges managers face in today’s fundraising market and provide key solutions to overcome them.
There’s been a market sell-off among LPs on the public market side, leaving them to rebalance their portfolios by adjusting their private market exposure. As a result of this and the risk-off sentiment encouraged by rising inflation, the number of funds closing and aggregate capital raised has declined sharply. Private equity fundraising dropped 50.5% by value and 57.8% by number of funds closed in Q2, compared with the same period last year.
A tougher macro-environment leading to longer fundraising cycles
Funds that closed in the first half of 2022 had been on the road for longer on average compared with funds closing in previous years. This suggests that the poor fundraising environment may have prompted some funds to close sooner than they otherwise would have.
Capital concentration: LPs favoring re-ups over new managers
Investors that have re-invested fund distributions into the asset class have increased private equity’s weighting in their overall portfolios. A larger portion of the re-investment is typically achieved through re-ups to existing managers rather than new managers, which helps to at least partly explain the capital consolidation trend that has shaped the industry in recent years.
The majority of surveyed investors plan to include at least some re-ups in their allocation. We expect this portion to increase as the industry matures. As a result, capital concentration is likely to increase further, making it more challenging for first-time managers to attract commitments.
Focus on investors that are most active in private equity
For most fund managers, capital concentration is the biggest challenge. To overcome this, you need to focus your time and resources on reaching out to investors that are actively allocating capital to funds like yours. Building your target list based on the type of investors that are the most active in the asset class can be a good start to narrow down your target. This can help reduce time spent on the road raising capital. And the quicker you achieve your fundraising target, the quicker you can invest that capital into companies to gain a competitive advantage over your peers.
Preqin tracks over 11,500 LPs active in private equity globally on Preqin Pro. See how our detailed profiles from large public institutions to individual family offices, and everything in between, could help you achieve your fundraising targets by requesting a demo today.
Identify LPs with relevant private equity mandates
To further narrow down your target list when fundraising, you can also prioritize LPs with mandates to invest in private equity funds like yours.
As of July 2022, Preqin tracks over 700 LP mandates and RFPs for the private equity asset class on Preqin Pro with detailed plans on how they will allocate to the asset class over the next 12 months. See how this data could help you boost your fundraising activity by requesting a demo today.
Analyze LPs’ current vs. target allocations for private equity
Finally, focusing your efforts on approaching LPs who are currently below their target allocations for the asset class can increase your chances of success when fundraising. Separating LPs that are over-allocated to the asset class from the ones that are under-allocating against their targets will help you pinpoint the right investors to approach.
Courtesy: Preqin Insights+