Private equity funds are taking much longer to raise capital, with record-low distributions limiting investors’ ability to commit to new funds.
The amount of money returned to investors at the end of last year was the lowest since 2009, according to Raymond James Private Capital Advisory. Distributions were 11.2% of net asset value, making it the second lowest rate recorded in the last 25 years.
In its first quarter fundraising market analysis report, the investment bank highlighted the pressure limited partners (LPs) are under, as capital continues to be called as normal, despite the lack of distributions and the impact of the denominator effect – when the value of one part of a portfolio, in this case the public side, decreases dramatically, resulting in the private side making up a larger percentage of the overall portfolio.
‘LPs’ ability to commit to their private equity programs is under unusually high pressure, further heightening the competitive nature of the fundraising market. The wide dispersion of returns within co-investment opportunities highlights the difficulties LPs face when identifying the best investments to double-down on,’ commented Sunaina Sinha Haldea, global head of Raymond James Private Capital Advisory.
This has resulted in funds taking much longer to raise their targets, spending an average of 18-19 months actively fundraising, the investment bank said.
Investors are increasingly choosing strategies that have historically had lower volatility, leading to a rise in allocations to larger buyout managers. This meant although the number of funds being raised in 2023 has come down – 29% from 2022 – the aggregate capital raised reached an all-time high of $500bn, up 51% from 2022.
‘The trend of consolidation towards larger funds and more established managers that we grew accustomed to seeing in 2023 shows no sign of slowing down in 2024. Manager selection in venture capital and growth GPs therefore continues to be key given the risk of significant losses despite potential for outsized returns,’ she added.
Although fund managers are now eyeing exits, there is still an unwillingness to sell at the prices buyers are asking for, Raymond James said. Last year saw median holding periods for portfolio companies hit an all-time high of 5.6 years. This means that fund managers are continuing to get creative to provide liquidity to their investors. This has included the use of NAV loans at the portfolio level or single-asset continuation vehicles that take out the debt and reset the cap table.