Home Venture Capital Roller-coaster market takes alternatives investors for a ride

Roller-coaster market takes alternatives investors for a ride


Fundraising in 2021 “broke all kinds of records” and is expected to slow this year in comparison, said Matt Segal, Chicago-based assurance partner, national private equity co-leader at accounting and advisory firm BDO USA LLP.

“That said, the fundraising landscape is shifting,” Mr. Segal said. “We are seeing a proliferation of megafunds.”

Thirteen U.S. megafunds, defined as funds $5 billion or larger, raised $143.4 billion in 2021, up from 12 funds that raised $119.4 billion a year earlier, according to PitchBook Data. In the first quarter, two U.S. private equity megafunds raised $25 billion, PitchBook shows.

Megafunds spiked in 2021 as a result of private equity firms raising larger funds at a faster pace, according to a PitchBook analysis released in January.

“This is becoming a bit of a balancing act for LPs because … investors are being tapped to commit capital and are finding themselves overstretched, so they are asking GPs to delay fundraising,” Mr. Segal said.

It’s always harder to raise capital when the markets are choppy, said Paul Lanna, a partner in Coller Capital Ltd.’s New York office. “I hear from a lot of LPs that they are struggling to find capital and find time to recommit to new funds.”

How the drop in the public markets affects investor perception and allocations to private equity and how that affects returns is an open question, Mr. Lanna said.

“Whether the public markets downdraft will filter into private equity returns … we will see how that goes,” he said.

U.S. private equity, for instance, produced eye-popping returns in the short term, with a 46.5% internal rate of return last year, moderating quickly down to 22.6% IRR for the five years, 18.6% IRR for 10 years, 13.8% for 15 years and 14.8% for the 20 years ended Dec. 31, PitchBook data shows.

Alternative investment returns are lagged by at least a quarter, and investors such as CalPERS generally compare alternative returns with real-time public markets.

One result of the denominator effect on LPs is that there will probably be sellers on the secondary markets and a good opportunity to buy secondary interests, Mr. Lanna said. Coller Capital invests on the alternative investments secondary markets.

But that won’t happen immediately, he said.

“We always think it (the denominator effect) will have an impact” and cause investors to sell limited partnership interests to keep their allocations to alternatives in line with the targets, Mr. Lanna said.

“But I don’t think LPs react that quickly,” he said. “It’s not something they would do on a quarterly basis. If the public markets stay depressed for a while, it could have an impact.”

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