Private equity firms are rushing to tie up investor cash as they navigate the most difficult fundraising market since the financial crisis over a decade ago.
Some of the industry’s best-known managers including Vista Equity Partners, Nordic Capital and Clayton, Dubilier & Rice have boosted their fundraising efforts by using rolling closes, according to people familiar with the matter. This tactic gives investors less chance to pull back from tacit commitments they’ve made and means the funds can make deals sooner without the worry of backers pulling out.
So far, it has helped some firms make progress as they bid to raise the largest funds in their histories. Vista raised $12.5 billion as of December, while CD&R has raised most of its $20 billion target through a succession of closes, some of the people said, asking not to be named because the information is still private. Nordic Capital concluded a 9 billion euro ($9.8 billion) raise in October.
“In the current macro-environment rolling closes can make a lot of sense for fund managers,” said Rhonda Ryan, head of European private equity at consultancy firm Mercer. “For example, if there is a significant macro-issue, as there was with the GFC, investors can’t decide to change their mind and not commit.”
Spokespeople for CD&R and Vista declined to comment.
The approach has become increasingly commonplace in recent months as the decade-long private equity boom comes to an end. Fundraising fell by an estimated 21.5 percent last year, according to data provider Preqin Ltd., as investors contend with inflation, rising rates and the so-called denominator effect, where falling stock prices inflate portfolios’ relative exposure to private equity.
Private equity funds are seeking almost $1.7 trillion of capital across different strategies and have so far collected about $949 billion, according to data compiled by Bloomberg. By the end of September 2022, the time spent fundraising for North American and European buyouts had increased to 24 months, from 16 months and 18 months respectively in the previous year, according to Raymond James.
“The oversupply of products coupled with the restrained capital available is causing the blowout of fundraising durations,” said Sunaina Sinha, global head, private capital advisory at Raymond James.
Timing Is Everything
Nordic Capital realized in the summer of 2021 that there was likely to be fierce competition for investor cash the following year, with many of the industry’s biggest names preparing to come back to market.
With this in mind, the firm moved its fundraising forward from April to January, Nordic Capital’s head of investor relations Par Norberg said in an interview. After raising 8 billion euros ($8.8 billion) through the first quarter of 2022, it took six months to collect the final 1 billion euros ($1.1 billion) as investors began to turn away from the sector.
“In an uncertain market, some of the remaining cash was locked in through employing rolling closes,” Norberg said. “Rolling closes are something firms deploy in years where there is more uncertainty, it is something that has always been there and the way it is being used is a function of the strength of the fundraising market.” The firm closed its fund on its upper limit in October.
Vista kicked off fundraising in January 2022 and raised $9 billion in the first few months, before holding a series of closes through the rest of the year to reach $12.5 billion by December, Bloomberg previously reported. It has until October next year to finish its fundraise, which is targeting $20 billion. CD&R has raised around $16 billion on its way to a $20 billion target, Bloomberg reported last month.
One and Done No More
That some well-known managers are turning to this approach is a reflection of the difficult fundraising environment. In sunnier periods, they would normally aim for a “one and done,” in which they close all of their committed capital on the same date, which can take place months after some investors have agreed to give them money.
“Historically, the rolling closes were predominantly for managers that were finding it a bit tricky,” Paula Langton, a partner at advisory firm Campbell Lutyens said. “Today, it has become more of the norm. A lot of them were used to doing first and final, which is something that has mostly been banished to history.”
It’s not just about securing the money. Once a fund has gone through a close, the private equity firm can begin to spend it on deals. This can help entice investors by giving them more visibility on the assets they will be owning, as well as the chance to co-invest alongside the managers.
“In some cases it enables you to move quicker in putting a deal together in the fund,” said Clay Deniger, a managing partner and chief executive at placement agent Capstone, which advises private capital firms on fundraising. “Taking a blind pool and putting in some seeded assets can be an important way to build momentum.”
Still, holding these rolling closes can be expensive from a legal and regulatory perspective, Deniger said. It can also kill momentum and in more buoyant times would be cautioned against.
“In any other market we would worry about the interim closes,” Deniger said. “But in a market like this, we somewhat put that aside and advise clients if you’ve got investors ready, then close the capital.”