After a record year for fundraising in 2021 – with at least $733 billion raised by private equity managers, per Private Equity International's Fundraising Report 2021 – the confluence of soaring inflation, rising interest rates and profound economic and geopolitical turbulence means LPs have finally hit the brakes.
ave finally hit the brakes. "We are clearly witnessing a slowdown in fundraising relative to last year," says Alexis Dziembowski, managing partner at AltamarCAM. "At the same time, there is still a record number of funds in the market."
Most LPs recognise the importance of maintaining their investment pace during a downturn. Indeed, Nicole Musicco, CIO of the California Public Employees' Retirement System, recently acknowledged that putting key programmes on hold during the global financial crisis probably cost their organisation between $11 billion and $18 billion in possible gains.
However, a dramatic public markets correction has left many investors grappling with the denominator effect. "Some investors are even facing liquidity problems," Dziembowski explains. "It's not surprising that GPs are correcting their fundraising targets."
"Everyone knows that 2021 was a great year for private equity fundraising, but the first half of 2022 has been very weak indeed," agrees JinHyuk Jang, international counsel in the funds/investment management group at Debevoise & Plimpton. War in Ukraine and the ramifications for the rest of Europe means the continent has been hit particularly hard.
"We are seeing quite a bit of hesitance from US investors, as well as some investors in Asia," says Richard Damming, co-head of private equity investments in Europe at Schroders Capital. "It is European investors that are still happily investing in the region because they understand that Europe has always been a low-growth economy, and yet – despite the GFC, sovereign debt crises, Brexit and covid – private equity has always delivered. Those factors bear no correlation to performance, and longterm investors recognise that."
David Stephens, partner and cohead of UK private equity at 3i, agrees that perceptions of tumult in Europe belie the reality, particularly on a relative basis. "Yes, Europe has its challenges, but in many ways, it's the best of a bad bunch.
"In China, we are still seeing covid lockdowns and there are geopolitical tensions elsewhere around the world. Despite the impact of war on the availability and cost of raw materials, Europe is still relatively stable, and investors value that."
Damming notes as an example that investors in South Korea are considering shifting the emphasis of their private equity programmes from China to Europe. "Institutions in Korea are heavily invested in the US and were in the process of building up their exposure to China. Europe was an afterthought. Now, China is becoming a lot more problematic for them, and Europe is becoming more interesting. The fact that Europe is stable, democratic and non-confrontational could play to the region's advantage."
"Europe is not immune to populism, of course," adds Dziembowski, "but we are still big believers in the strength of its institutions, political culture and the quality and potential of its private sector.
"Europe also boasts a great community of GPs that have delivered through the cycles and are more sophisticated today in terms of how they support their portfolio companies."
High-net-worth wagers
While institutional investment may be losing some momentum, industry participants are excited about the potential that the vast private wealth market represents. "A lot of high-net-worth investors have realised that their public markets portfolios have performed terribly over the last few months, and [they] have an increasing appetite for private markets today," says Dziembowski. "At the same time, we are also seeing more semi-liquid solutions emerging that make private markets more accessible to those individuals. That, potentially, represents a huge opportunity. Through our partnerships with private banks, we already have more than 20,000 direct retail client accounts today. Our technology platform helps us manage these relationships in a very client-friendly and efficient way – from a paperless onboarding process to state-of-the-art reporting on our online LP portal."
porting on our online LP portal." "Not only are we seeing greater investment appetite from high-networths, but we are also seeing GPs proactively approaching these groups more than they have ever done in the past," adds Jang. "The administrative effort involved in working with hundreds of smaller-ticket investors and the associated regulatory burden has previously put managers off. But some are now pursuing partnerships with wealth managers and private banks, which are creating feeder vehicles, which make everything a lot easier."
Jang adds that there are discussions underway to amend the EU Alternative Investment Fund Managers Directive regulation to expand the definition of professional investor. "I see this as a real opportunity for private equity," he says.
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Originally Published by Private Equity International
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