Private Equity Fundraising Hits Its Lowest Since 2017
Finex Hong Kong Limited
Private Placement and Investment Advisory, Asset Management, Fund Structuring (PI only)
In 2023, the private equity sector worldwide experienced a substantial decrease in capital acquisition, reaching its lowest level since 2017. The overall funds gathered surpassed $1 trillion, marking a 22% reduction compared to the previous year. This decline starkly contrasts with the vigorous expansion observed in the preceding two years. It underscores a notable deceleration across various asset classes and geographic regions, as reported by McKinsey & Company.
Overview of the Global Decline
The global decline in private equity fundraising was evident, with varying regional impacts. In North America, fundraising dropped 22%, notably affecting the infrastructure, natural resources, and real estate sectors. Asia saw the most significant reduction, with a 48% decline, hitting its lowest level in over a decade. Europe, however, showed greater stability, with only a 2% decline, amounting to $243 billion, which accounts for almost a quarter of the worldwide market of private equity fundraising.
McKinsey's findings identify several causes for this reduction. Smaller funds were affected disproportionately, with just 1,650 funds under $1 billion closing throughout the year, this is the lowest number since 2012.? This figure is about half the number of funds established in 2022. Consequently, the top 25 fund managers secured 41% of the total funds raised, the largest share since 2008, out of which the top ten managers alone obtained 26% of the overall amount.
Trends in Private Equity Fundraising
The private equity sector, a major part of private market fundraising, experienced a 15% decline in capital raised, amounting to $649 billion. This downturn is due to a more conservative deal-making environment, elevated interest rates, investor skepticism, and geopolitical uncertainties. Venture capital and growth equity strategies suffered the greatest effects, with the total capital raised reaching its lowest level since 2015.
Despite the decrease in fundraising, private equity firms saw an 8% increase in assets under management (AUM), which climbed to $8.2 trillion. The improved performance of existing portfolio assets largely drove this growth. Although investment returns are generally consistent across various fund sizes, larger funds exhibit lower volatility. This highlights the critical role that fund strategy and portfolio management play in generating optimal returns and explains the increasing trend towards larger funds and market consolidation.
Key Factors Behind the Slowdown
There are several factors that have contributed to the decline in private equity fundraising:
1. Liquidity Constraints: The typical cycle of raising, investing, and exiting capital has been interrupted. Fraser van Rensburg, managing partner at Asante Capital, pointed out that reduced M&A activity has delayed the return of capital to limited partners (LPs), impacting their capacity to reinvest in new funds.
2. Macroeconomic Influences: Elevated inflation and interest rates, along with geopolitical instability, have undermined investor confidence and curtailed deal activity. Ryan Schlitt, CEO of Aviditi Advisors, mentioned that approximately 75% of global institutions are currently at or above their allocation limits for private equity.
3. The surge in Dry Powder: The volume of uninvested capital, known as "dry powder," has reached record highs, further weakening overall fundraising numbers. Pension funds and other institutional investors over-allocating to private equity exacerbate this issue.
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Notable Trends and Exceptions
Despite the difficult fundraising environment, there were remarkable exceptions. For instance, CVC Capital Partners Ltd. secured the largest private equity buyout fund ever, amassing $28.73 billion in around seven months. This fund was significantly oversubscribed, indicating robust investor interest despite the broader market challenges. Similarly, SoftBank's Vision Fund II-2, which focuses on startups and unicorns, raised $56 billion but was unable to reach its $108 billion target.
The concentration of fundraising among a few key players highlights a shift towards familiar and perceived safe investments. In 2023, the top 10 funds raised comprised roughly 28% of the global total, compared to 17.7% in 2022. This trend suggests an increasing preference for well-known names and larger funds amid market uncertainties.
Impact on Fund Launches and Strategies
The fierce competition for new capital resulted in a considerable decline in fund launches. In 2023, only 952 funds were initiated, a steep drop from 2,284 in 2022, making it the lowest since 2013. North American private equity firms spearheaded the market entries, followed by those in the Asia-Pacific and Europe.
Investors have gravitated towards mid-market funds, which typically undertake smaller transactions and employ less leverage than large buyout funds. These funds often invest in companies less dependent on the IPO market, providing alternative exit strategies. For larger funds, maintaining consistent performance is vital. For example, the New Jersey Division of Investment allocated €250 million to CVC's record buyout fund, citing its history of delivering at least a 2.0x net total value to paid-in capital over two decades.
Looking Ahead
There are signs that fundraising might improve gradually in 2024 despite the current downturn. Interest rates are anticipated to decline, and public market sentiment is becoming more positive. An uptick in M&A activity could result in more distributions for LPs, allowing them to reinvest in existing or new funds. Additionally, GPs are exploring alternative liquidity options, such as GP-led secondaries, to unlock capital for new fund commitments.
As the market navigates these challenging times, private equity firms must focus on strategic fund management, effective deal-making, and strong performance. While the era of easy money may be over, the private equity sector's resilience and adaptability indicate that it will continue to play a crucial role in the global financial ecosystem.
Conclusion
The private equity fundraising landscape in 2023 faced significant obstacles and notable changes. The sector's capacity to adjust and evolve in response to these conditions will shape its future path. Despite the challenges, the lasting allure of private equity as an asset class and its potential for substantial returns ensure it will remain a central focus for investors worldwide.
References:
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-equity-fundraising-plunges-to-6-year-low-in-2023-79994493 https://www.business-standard.com/finance/personal-finance/pe-vc-investments-down-63-to-9-billion-in-2023-lowest-since-2016-124011600212_1.html https://www.mckinsey.com/industries/private-capital/our-insights/mckinseys-private-markets-annual-review
Director & Head of Origination at Finex Hong Kong Limited
5 个月Challenging times for fundraising