So far in 2022, fundraising efforts have seen a significant drop in allocations. Industry observers point to five key reasons that are driving this pullback.
Experts cite macroeconomic uncertainty, allocator diversification, industry overcrowding, lack of exits and lack of liquidity as the main reasons for the pullback.
Macroeconomic tensions certainly loom large over all investors. “There is uncertainty around the global macroeconomic climate (energy prices, supply chain shortages, labor issues), as a result of various geo-political issues (China trade war/Ukraine war) along with domestic U.S. issues around immigration, supply of labor, etc.,” says Fraser Van Rensburg, founder and managing partner at Asante Capital Group, an advisory and private markets placement firm.
Asante has helped over 68 funds raise roughly $37 billion in capital. The group has seen record numbers followed by a swift slowdown in recent years. “The peak was 2019, and 2020 and2021 were strong, too, but 2022 is down,” adds Van Rensburg.
He believes general partners haven’t adapted to this new environment. “There is still market overcrowding from the GP side, so the supply/demand crossover is making it more difficult to raise funds.”
Ropes & Gray partners Isabel Dische, Debra Lussier, Laurel FitzPatrick and Bryan Hunkele believe there are more factors at play. They say that a squeeze on liquidity and allocators seeking diversification could be slowing down private equity fundraising.
“LP allocations for 2022 are already stretched,” says Isabel Dische in an article posted on Ropes & Gray’s website. The team believes the drop in public equities and bonds has made private equity a bigger portion of LP portfolios, which may have compelled some to diversify.
Meanwhile, allocators are also committing more funds to blue-chip GPs such as KKR and the Carlyle Group which has left less capital for smaller fundraisers. Pitchbook data suggests 58 percent of the funds raised in the first half of 2022 were targeted at funds larger than $5 billion.
LPs have also faced a lack of exits in 2022. That may have amplified the squeeze on liquidity and it’s far from certain when this squeeze will end.