Private markets

Private markets fundraising shifts down a gear

09 October 2023

Duncan Richer, UK, VP Private Markets Team; Nikhil Patel, UK, AVP Private Markets Team

Please note: This article is intended for readers with a solid understanding of investments. Investing in private markets is often complex, illiquid and brings higher idiosyncratic risks than public markets, and so is only suitable for experienced investors. This communication is also general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. Past performance and simulated past performance are not reliable indicators of future results. The value of investments can fall as well as rise and you may get back less than you invested.

Key points

  • The recent surge in interest rates and heightened macroeconomic uncertainty have changed some of the dynamics in private markets. Fundraising in the first half of this year was 35% lower than the same period in 2022
  • Despite the tougher conditions, investors continue to commit to new funds. They are, however, becoming more selective, with a flight to familiar names
  • A slower fundraising environment can be more favourable for buyers and bring new opportunities for private investors. However, there are additional risks to navigate, and so careful manager due diligence is essential
  • While the turn in private market funding can be disconcerting, staying focused on the long-term goals, and on building a diversified portfolio of assets that could achieve them, can help keep things in perspective

Macroeconomic uncertainty dampens demand

After more than a decade of soaring growth, the flow of new capital into private markets has eased. This article delves into what’s driving the trend, and the potential implications for investors.

Private markets have attracted record-breaking levels of capital over the past decade, shaking off the temporary setback of the COVID-19 pandemic to reach an all-time high of $1.4 trillion in 20211. A reversal of that trend began in late 2022 and has continued to take hold in 2023 (see chart). Globally, firms still raised an impressive $517 billion in the first half of this year, but this was 35% lower than in H1 20222.

Macroeconomic uncertainty, geopolitics, rising interest rates and volatility in public markets have all contributed to the more subdued environment. Institutional investors in particular have reined in their commitments, in many cases because of the so-called denominator effect, which occurs when disproportionately weaker performance from listed investments increases a portfolio’s percentage allocation to private assets. Investors such as pension or endowment funds, who are required to keep allocations within regulatory or investment policy limits, may then need to reduce their private markets commitments to redress the balance.

Rolling 12-month private capital fundraising activity

Rolling 12-month private capital fundraising activity.

Source: PitchBook Data Inc, Barclays Private Bank, 30 June 2023

Fund distributions decline as exits stall

Fund distributions have also slowed, partly as a result of a slower exit environment, which in turn has had a knock-on effect on fundraising. Distributions were clearly down in 2022, from a record high in 2021, but remained strong compared to earlier years (see chart)3.

With some managers sitting on assets and delaying exits, investors may be unable to recommit their capital to new investments at the same pace as before. For example, private equity buyout funds are holding a record $2.8 trillion in assets not exited yet – over four times the level held during the global financial crisis4.

However, the fall in distributions has coincided with a similar reduction in capital calls as fewer deals take place. This means any investors relying on distributions to fund existing commitments should not be caught out. In 2022, the balance of distributions minus contributions left investors with only a slightly negative net cashflow for the year, a situation that is not uncommon (see chart)5

Private capital cash flows

Private capital cash flows.

Source: PitchBook Data Inc, Barclays Private Bank, 31 December 2022

Flight to established names

While overall fundraising has slowed, it certainly hasn’t ground to a halt. Many investors continue to commit to new funds, despite being overweight to certain asset classes, according to Preqin data6. They are, however, becoming more selective, and perhaps unsurprisingly given the macroeconomic uncertainty, there has been a flight to familiar names.

Established funds with proven track records have grown their share of new investment, at the expense of emerging names. Between 2008-2021, emerging managers captured 30.5% of total capital raised, but this fell to 17% over the five quarters to March 20237. Larger funds have also benefited over smaller ones, with the over $5 billion segment of mega-funds seeing a 51% increase in capital raised in 2022 (compared to 2021)8. In the first half of 2023, however, demand for mega-funds eased, and the mid-market segment ($100 million to $5 billon) attracted around 60% of private equity funding (compared to 50% in 2022)9

The time (in months) taken to raise capital has remained remarkably stable (see chart), but dispersion within the market is starting to increase. According to PitchBook Data, Inc, the median fundraising window has been 12-13 months since 2008, although in 2023, the spread between the fastest quartile of funds to close (4.6 months) and the slowest (19.8 months) has widened10

Dispersion in time (months) to close for private capital funds

Dispersion in time (months) to close for private capital funds.

Source: PitchBook Data Inc, Barclays Private Bank, 30 June 2023

What could this mean for private investors? 

A lower fundraising environment can bring both new opportunities and potential risks for investors.

  • A buyer’s market

With some institutional investors less willing or able to commit as much capital, more opportunities are emerging for private investors. We’re seeing funds that were previously oversubscribed and limited to existing investors, now opening up to new sources of funding. Private equity firms are also increasingly offering more favourable terms to attract new capital, as well as incentives for investors who can make larger commitments11

Market supply-demand dynamics have clearly shifted in favour of buyers – it’s estimated that for every $3 of capital the firms are looking to raise, investors have only $1 to allocate12. This means buyers can afford to be selective and may be in a better position to negotiate the terms of any new capital commitment. 

  • Opportunities across the cycle

Fundraising in private markets tends to be cyclical over the long term, so a slower fundraising environment is not unexpected given the recent pace of growth. Nor is it necessarily bad news for investors, as there is no indication that fund vintages from lower fundraising years tend to underperform those launched at other times13. And while there is still plenty of ‘dry powder’ (or capital that has already been raised) waiting to be invested in the near term, a more uncertain, less crowded – and therefore competitive – market can be positive for managers seeking to deploy their capital.  

Attempting to time the market, be it public or private, is notoriously difficult, and interesting opportunities occur throughout the cycle. Building a diversified exposure across different fund vintages and strategies can both reduce risk and improve returns over the long term.

  • Longer timelines and concentration risk

A more challenging fundraising environment may mean managers need to extend their fundraising timelines, delay or even cancel fund launches. Alternatively, if managers decide to scale back their fundraising targets, their funds could become overly concentrated in a smaller set of investments. 

Assessing a manager’s chances of a successful fundraise is an important part of the due diligence process. Managers can help reduce concentration risk by allocating smaller amounts to a range of investments, and then scaling up gradually as the amount raised increases. For investors, making smaller allocations to a broader range of funds could help mitigate it further. 

  • Manager selection matters

Slower fundraising is symptomatic of a weaker macroeconomic backdrop, and not all managers will have the skill and experience to navigate a more challenging environment successfully. When considering any new investment, understanding the manager’s strategy to create value, and careful due diligence on their team and track record, will be even more important. 

A long-term endeavour

While negative news or signs of weakness can be disconcerting, a typical private markets investment horizon is around 10 years, and a lot can change over a decade. Staying focused on long-term goals, and on building a portfolio of assets that could achieve them, can help keep things in perspective.


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