Global private equity fundraising fell 11.5% year over year by aggregate value in 2023, the lowest total since 2017, while the 1,936 funds closed was the smallest annual number since at least 2015, according to Preqin data.
Liquidity has been an issue that has disrupted the cycle of raising capital, investing and exiting, said Fraser van Rensburg, managing partner at placement agent Asante Capital.
Macroeconomic conditions drove a decrease in M&A, and exits fell, disrupting the flow of capital back to limited partners (LPs), van Rensburg said.
"When that cycle slows as a result of a slowdown in M&A activity, the money just doesn't get back to LPs as quickly, and that has a knock-on effect on how much those LPs can put into new funds."
Record dry powder — the hoarding of ample capital already raised and waiting to be invested — and the overallocation to private equity by pension fund investors are also behind the overall weak fundraising totals.
"It's believed that around 75% of the institutions globally right now are at allocation," said Ryan Schlitt, CEO and co-founder of placement agent Aviditi Advisors.
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Record buyout fund
Senior management at Blackstone Inc., KKR & Co. Inc. and The Carlyle Group Inc. warned about the difficult fundraising environment on earnings calls in 2023. Carlyle and Apollo Global Management Inc. also closed buyout funds that fell short of their targets.
Yet in the relatively miserable year for gathering capital, UK-based CVC Capital Partners Ltd. raised the largest private equity buyout fund in history in about seven months, according to S&P Global Market Intelligence data.
CVC Capital Partners Fund IX pulled in $28.73 billion, oversubscribed by $2.27 billion. Top investors included South Korea's National Pension Service, which allocated $710 million, as well as the Canada Pension Plan Investment Board and the Government Pension Investment Fund of Japan, each putting in $546.3 million.
The fund, which focuses on European buyouts, pulled in roughly 85% of the capital from returning investors, according to a firm spokesman.
Previously, the largest buyout fund ever was North America-focused Blackstone Capital Partners VIII LP, which raised $26.20 billion and closed in October 2019, Market Intelligence data shows.
On the venture capital side, SoftBank Investment Advisers (UK) Ltd.'s SoftBank Vision Fund II-2 LP, a vehicle focused on startups and unicorns, raised the largest amount for private funds closing in 2023, at $56 billion, but was $52 billion under target.
The top 10 fundraises of 2023 accounted for $231.6 billion, or roughly 28%, of the total global amount, an indication that investors fled to the familiar names. Seven of the 10 products on the list were from large brand name private equity firms based in the US.
By comparison, the 10 largest funds raised in 2022 accounted for 17.7% of the total.
Fund launches at decade low
With fierce competition for fresh capital, the number of funds that launched in 2023 dropped dramatically. Only 952 products launched compared to 2,284 in 2022, Market Intelligence data shows. It was the lowest total since 2013.
North American private equity firms accounted for the largest number of funds entering the market with 471. Asia-Pacific's 244 funds launched in 2023 exceeded Europe's 172.
Currently, LPs tend to favor midmarket funds because they do smaller deals, typically use less debt than big buyout funds and tend to invest in companies that do not rely on the IPO market, said Karen Derr Gilbert, partner at FTV Capital. "They can rely on both strategic and financial sponsors as potential exit paths."
For larger funds, consistent performance will be key. The New Jersey Division of Investment, which put €250 million into the record buyout fund from CVC, said in a statement that "for the past 20+ years, every mature CVC flagship fund has individually returned at least 2.0x net [total value to paid-in capital]."
"[LPs] are looking for strategies where the general partner (GP) has a proven track record through multiple economic cycles," said Derr Gilbert. "And those are the kinds of GPs that are going to sort of top the list for both re-ups and for new commitments."
Improving outlook?
Several signs point to a gradual fundraising rebound in 2024. Interest rates are widely expected to be cut, and public market sentiment continues to improve.
M&A activity is expected to pick up, "which will correlate to more distributions for LPs to invest in existing managers or new managers and also the public markets have rebounded from a denominator effect standpoint," said Aviditi's Schlitt.
GPs are also using alternative ways of providing liquidity for investors such as GP-led secondaries, which can free up capital for new fund allocations.
"Everything is pointing in the right direction in terms of dealmaking, exiting companies in the public markets, stability, reduction of interest rates," said van Rensburg from Asante Capital. "But there is generally a 12- to 18-month lag as that flows through to private equity capital raising, so we will only really see the improvements in private equity capital raising from the second half onwards."