PE Fundraising Is Becoming a Package Deal

The way firms are raising money today looks increasingly different from the traditional model of asking investors to commit capital to a blind-pool flagship fund. Here’s how the succesful fundraisers are doing it:

Large institutional investors are using a difficult fundraising market to demand more than access to the next fund. Co-investment rights, separately managed accounts, fee discounts, secondary liquidity and commitments to adjacent strategies are increasingly being negotiated alongside flagship allocations, effectively turning fundraising into a broader capital-solutions exercise.

Firms raising the biggest funds fastest are obliging. More money is flowing to fewer managers. But those commitments can come with considerably more strings attached.

Sponsors are raising flagship funds alongside co-investment vehicles, separately managed accounts and other customized pools as large LPs seek more control over fees, deployment and liquidity. The straightforward, passive blind-pool commitment is increasingly becoming a negotiation over the entire relationship.

The result is starting to blur the line between fundraising and structured finance.

Co-investment has become particularly important. Large institutional investors increasingly view co-invest access as a standard part of their GP relationships and that the subject is routinely addressed during fundraising and in side letters. Sponsors are also using programmatic partnerships, SMAs and customized co-investment pools.

Co-investment funds themselves are becoming multibillion-dollar flagships:

“The co-investment market continues to evolve as sponsors seek partners that can provide certainty of execution, flexible and scaled capital, and strategic support across increasingly complex transactions,” HarbourVest Managing Director Ian Lane said announcing the close. “We are seeing improving market conditions, greater transaction activity, more opportunities to generate liquidity, and continued opportunities across both buyout and growth equity. 

Separate accounts add another layer. Hamilton Lane, for example, raised $3.8 billion in and alongside its latest direct-equity fund, while offering the strategy through both commingled vehicles and discretionary accounts. Clearlake’s latest close likewise includes SMAs alongside its flagship and co-investment pools.

Rather than treating secondaries, GP stakes and co-investments as separate buckets, allocators are increasingly using them together to manage pacing, rebalance portfolios and generate cash flow. Even traditional flagship funds are starting to look more bespoke around the edges.

Firms such as Ares Management (NYSE: ARES), Blue Owl Capital (NYSE: OWL) and Golub Capital have embedded first-close and scale-based fee tiers into their direct lending and opportunistic credit vehicles, offering early investors lower management fees and preferential co-invest access that step up as funds mature.

The cumulative effect is a gradual, but meaningful shift in fundraising dynamics. Capital is concentrating among managers willing to accommodate customization, while firms that adhere to standardized structures face longer fundraising cycles and more selective re-ups.

The Canada Pension Plan Investment Board, operating as CPP Investments, has long taken a “total portfolio” approach, deploying across secondaries, co-investments and direct deals with the same GPs. It has participated in large GP-led continuation vehicles, while also committing to successor funds and co-investing alongside sponsors, effectively bundling exposure types within single manager relationships.

Other large LPs have followed suit, including the New Jersey Division of Investment, Alaska Permanent Fund Corporation and Teachers Retirement System of Texas.

The LPs’ increased bargaining power reflects a market that remains difficult for many managers despite improving fundraising totals. Institutional investors are still contending with large portfolios of older private equity funds and years of weak distributions, leaving many reluctant to add new blind-pool commitments unless they receive something in return.

Public pensions have also been reassessing private equity exposure and a growing number are cutting PE commitments.

Co-investments have become one of the most valuable currencies in those negotiations because they allow LPs to put more money to work without paying the full management fees and carried interest associated with traditional fund commitments. Large investors can also use SMAs to tailor exposure by industry, geography or deal size.

The trend favors firms with multiple products and large capital-markets operations. Managers that can offer co-investments, private credit, secondaries, infrastructure or customized accounts have more ways to negotiate with LPs than firms relying on a single flagship strategy.