Private equity players warn of fundraising "shake-out"

The challenges to fundraising in the current market are widely acknowledged. A backlog of managers coming to market after a lull in 2020, combined with a shorter deployment cycle for those who have fundraised over the past two years, has made for a crowded market.

While managing an unexpectedly high number of re-ups, many LPs have also had to contend with managing the denominator effect in their portfolios thanks to public markets fluctuations. These capital and time constraints make for a simple supply versus demand issue for GPs looking to raise capital for their funds.

In response to this, many investors are "weeding out" their relationships and commitments, one LP told Unquote.

Generalist concerns
Fears for mid-market generalist managers are not a new phenomenon, with the acronym "JAMBO" ("just another mid-market buyout group") coined to refer to the proliferation of these managers. However, the problem could become more acute in the current environment.

"What do you have to offer your LPs as a generalist?" one asset manager asked. Without a unique angle, generalist players are less likely to win deals in a competitive market where high-quality assets are in shorter supply than they were in 2021.

Managers with large-cap and mid-cap strategies should be safe, the same LP told Unquote, noting that this dual strategy is a differentiating factor versus other GPs.

While the sources who spoke to Unquote were reluctant to name names of peers who might be struggling, one high-profile casualty of this phenomenon last year was Silverfleet Capital, as reported.

Shifting dynamics
LPs will be increasingly scrutinising how their GPs make their returns, drilling down to analyse the role of fund financing facilities in boosting IRR, Mikkel Svenstrup, chief investment officer at pension fund ATP, said in a panel at IPEM.

However, provided that GPs are clear and transparent with their investors, this should not be a significant problem, one sponsor told Unquote.

Investors might expect to see better co-investment opportunities as they are forced to thin out their managers, ATP's Svenstrup said in the same panel. In spite of this, fund terms are not expected to shift significantly in favour of LPs. Although LPs might try to make a hard bargain, they will ultimately do their best to support the managers that they have, he added.

Incentivising LPs could help sweeten the deal for them, one private assets manager said. GPs might be required to put more skin in the game earlier on, putting in larger and earlier GP commitments to their funds, they said.

Bright spots
Making the case for generalists, one LP pointed out that investors often do not need a generalist in their portfolio; many aim to build their own diversification via specialised managers in sectors, geographies and strategies, meaning that adding a generalist into the mix is not necessary. However, making the case for generalists, they noted that smaller LPs who might make fewer commitments per year will still see value in building a generalist into their smaller portfolios.

While certain strategies might struggle, several advisers and GPs made the case for the fact that many European LPs are under allocated to private markets, meaning that there is plenty of capital that could yet flow into the market.

Much of the private equity market is therefore continuing as normal, with fundraising plans and fund targets currently not taking any hit as yet, two advisers told Unquote. "There will be less capital raised, but not no capital," a second asset manager told Unquote, noting that private market strategies, including private equity, are likely to remain appealing.

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