This year has been a challenging one for middle market private equity firms to raise funds, investment bankers are telling Mergers & Acquisitions. Many funds investing outside of growth businesses like technology, digital and healthcare are likely to take longer to close than in recent years, they say.

A confluence of factors – COVID-19 travel restrictions, the fast pace of M&A in the last few years and the decline in public equity – have created conditions in which the largest private equity firms like Permira and Advent International have been able to raise funds, but smaller firms’ efforts might take longer– a lot longer.

“COVID-19 significantly impacted fundraising dynamics with many general partners not launching new funds during 2020 and 2021 ,” said Cristina Forcina Westermann, global co-head of private funds group at Houlihan Lokey. “As a result, a wave of funds went to market all at once in the fourth quarter of 2021. The landscape became congested with an unprecedented amount of re-ups for limited partners, and created a demand versus supply imbalance.”

Moreover, Westermann said, the heady pace of M&A in the last few years pushed GPs to accelerate their fundraising cycles.

“In 2014 the average time between final closes of private equity funds was 48 months versus 22 months in 2021,” she said. “With exit activity slowing down this year, distributions to LPs have decreased, leaving investors with less liquidity to commit to funds.”

The bear market has also contributed to lost confidence among buyers and sellers, compounding LP illiquidity, said Darius Craton, director at Raymond James Private Capital Advisory. “LPs typically have portfolios of mixed assets, with around 10 percent to 15 percent going to illiquid private equity.

“When there are huge selloffs in a downturn, confidence is affected and LPs may pause to re-evaluate their investment programs and to minimize risk,” Craton said. “As the value of public portfolios decline, private equity allocations can become outsized. In such a scenario, there’s no mechanism to easily sell private equity assets and free up capital without potentially trading at a steep discount on the secondary market.”

Though blue chip firms such as Advent, Silver Lake and Thoma Bravo have been able to successfully raise new funds through the pandemic, GPs that “have a story to tell” face more difficulty, Craton said. “For example, for firms with spotty track records or performance below peers, LPs are having to be choosey. Perceived quality issues are difficult to overcome.”

Craton said private equity firms can help shape the narrative by starting conversations as early as possible with LPs without mentioning time constraints on fundraising timelines. This allows conversations to begin without pressure. To get above the noise of a crowded market, it’s best if GPs can show consistent performance track records or a differentiated value-add strategy, he added.