In the private equity (PE) market, a significant shift is occurring as Limited Partners (LPs) increasingly demand the release of funds from older investments before considering new commitments. This change comes amidst a backdrop of unprecedented levels of «dry powder» - uninvested capital within PE firms.
Limited Partners, including Middle Eastern sovereign wealth funds and pension funds, are now pushing for greater transparency and better terms. They seek a say in how their money is used, alongside lower fund management fees, in a market where traditional return targets are more readily met with fewer alternative assets.
Some LPs have stated their participation in new fundraising is contingent on the release of their capital from existing funds. This trend signals a notable shift in the power balance of the private equity industry. “We’re now undergoing a real cultural change,” said William Barrett, managing partner at Reach Capital, a private-market fundraising firm in a recent Bloomberg interview. “It’s the first time we’re seeing LPs being so straightforward and linking a distribution from one fund to a new commitment in another. They’ve never been so precise with their asks.”
Money back
The desire among European Limited Partners to reclaim their capital is growing. A portfolio manager at a European institutional asset manager acknowledged to Investment Officer the industry’s facing client demands for fund returns. «It’s unusual for a private market where money is typically locked in for seven years,» he said.
Despite the abundance of dry powder, private equity experienced a lackluster year in 2023 following a strong performance in 2022. According to S&P Global, the level of dry powder in PE firms rose to 2,590 billion dollars, an 8 percent increase from the previous year. Apollo Global Management leads with over 55 billion dollars in untapped capital.
The private equity sector’s struggles are also mirrored in the decline of deals, which dropped by thirty-five percent last year compared to 2022, as per Bain & Co. data. Strategic deals saw a fourteen percent decrease. Buyout groups are now sitting on a record two thousand eight hundred billion dollars of unsold investments.
Continuation funds
This downturn, coupled with an increased reliance on leverage rather than asset sales, indicates PE firms› caution against realizing losses. In response, they have adopted diverse strategies, including net asset value financing and secondary sales. Pitchbook highlights continuation funds as the most exciting innovation, offering a lifeline for older funds nearing expiration.
«The private equity game of raising new capital to buy old fund holdings is ending,» a Dutch portfolio manager noted. «The next five years will be critical to see if normalcy returns.»
Early indicators of a turnaround are emerging, driven by expectations of falling interest rates and better valuations by 2024. S&P Global Ratings reports that the value of global private equity and venture capital deals rose in November to 47 billion dollars, a 34 percent increase from October.
Luxembourg leads in Europe
European private equity fundraising, according to Pitchbook, was on track for a record year by the end of November, raising over 110 billion euros. Luxembourg-based CVC Capital Partners Fund IX led the pack, raising 26 billion euros. They were followed by Permira Fund VIII with 16.7 billion euros and KKR European Fund VI with 7.5 billion euros. These top three funds are projected to raise 45 billion euros by 2024, according to Nicolas Moura, a PitchBook analyst.