SPOTLIGHT: THE RESILIENCE OF THE PRIVATE CAPITAL LANDSCAPE -

The private markets experienced a whirlwind of events in 2022, with fundraising activities navigating through contrasting trends. Despite formidable challenges like high inflation, interest rate hikes, geopolitical uncertainties, and the denominator effect, fundraising managed to achieve a commendable milestone, reaching $1.2 trillion, a figure on par with pre-pandemic levels. However, this marked an 11.4 percent decline from the previous year's record-breaking total of $1.4 trillion. As we embark on the journey of 2023, the private capital fundraising environment remains challenging, with early data suggesting that new records may be unlikely.

Challenges Confronting Emerging Managers:

Emerging managers, typically defined as asset managers raising three or fewer funds firmwide, have felt the brunt of the fundraising slowdown. Historically, these managers accounted for around 30.5% of total assets raised, but their share has now diminished to approximately 16.9% over the last five quarters. Emerging funds in private equity and real assets have slipped below the 50% mark, while emerging VC has managed to maintain a slightly higher position. The plight of emerging managers is further exacerbated by their lack of prior fund performance to bolster their pitches, making it challenging to secure commitments from cautious investors.

Time to Close Funds:

The timeline for funds to reach final closings has generally shown stability over the years, with a median of 12 to 13 months. However, a concerning trend is a widening gap between the fastest and slowest fund closures, indicating a more intricate fundraising environment. In 2023, top quartile funds took a staggering 19.8 months to close, while bottom quartile funds only required 4.6 months, resulting in a significant 15.2-month disparity. This disparity suggests that limited partners (LPs) are becoming increasingly discerning and prudent in their investment decisions, leading to extended fundraising periods for some managers.

Years Between Final Closings:

The median duration between final closings in a fund family has exhibited a flat to declining trajectory over the years, with recent data pointing to an average of 2.2 years. Notably, this figure is lower than the 2011-2014 period, during which it exceeded three years. While recent fundraising challenges may be cause for concern, the data suggests that it could be a return to a more typical long-term trend rather than a problematic industry-wide issue. It is important to note that struggling funds may not even make it into the data, creating a downward bias in the statistic for funds that successfully close.

Regional Trends:

Asia's share of global capital raised has experienced a significant decline, plummeting from 31.3% in 2018 to a mere 8.2% in 2023. This sharp decline may be attributed to geopolitical tensions and economic impacts from events such as the war in Ukraine. Similarly, Europe's share has also diminished, with only 17.5% of global capital raised in 2023. In contrast, North America has managed to maintain its share of global capital raised, reaching an impressive 76.4% in 2022. This resilience in North America may be attributed to institutional investors seeking a haven from the volatility of public markets.

Impact of Larger Funds:

In recent years, funds larger than $1 billion have garnered a larger share of capital commitments, reaching approximately 65% since 2013. The definition of mega PE funds has evolved from $1 billion-plus to $5 billion-plus, reflecting the need for larger funds capable of handling more substantial deals. However, this trend may also be leading to the completion of larger deals, necessitating even more massive funds to write these substantial checks. It is essential for fund managers to carefully assess the potential implications of such developments on deal sizes and market dynamics.

Challenges and Opportunities Ahead:

The private capital fundraising landscape poses formidable challenges that demand agility and innovation from fund managers. Successfully navigating through changing market conditions and comprehending regional dynamics will be pivotal for fundraising success. Establishing trust and credibility with investors through transparent and responsible investment practices will be paramount. Fund managers that adeptly navigate these complexities and embrace innovation, such as tokenized funds and structured vehicles, will be positioned to thrive in the evolving world of private markets.

Conclusion:

While 2023's private capital fundraising environment may not break records, it presents challenges and opportunities for fund managers. By adopting a strategic and adaptive approach, understanding regional trends, and cultivating robust investor relationships, fund managers can surmount obstacles and achieve sustained growth and success for themselves and their investors. Embracing technological advancements and staying attuned to market dynamics will be vital to thriving in the ever-evolving landscape of private markets in 2023 and beyond. As the landscape shifts, fund managers who embrace change and seize opportunities will pave the way for a resilient and thriving private capital ecosystem.

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Contributions: McKinsey Private Equity Report 2023. Pitchbook Private Markets Fundraising Report Q1 2023