Private Equity in 2024: Insights and Fundraising Challenges
Towards the end of the year we attended three conferences which, alongside meeting GPs and LPs, provided excellent input to our thoughts as we come to the end of another hectic year in Private Markets.
The conferences all focused on Private Markets, but were also quite different.
- PEI Nordics in Stockholm focused mainly on private equity.
- 0100 Mediterranean in Milan focused mainly on VC, but with an ‘allocation’ for buyout. As one attendant in Milan quipped “With VC in the main room and PE in the basement, the world is literally upside down”.
- The European Alternative Investments Conference in Copenhagen focused on academic / research insight and was the more thought provoking of the three.
Turnout was very good
And being smaller, they were a bit more intimate and drew in LPs that are not natural attendants at the larger conferences. The LP audience in Stockholm was more institutional, Milan was well-attended by family offices, and in Copenhagen it was the broader Danish alternative investment community.
At all three conferences it was easy to meet and talk to people and make new connections. The ratio of GPs to LPs was also more equal than the usual 10:1, probably making the latter feel less like hunted prey.
We could not attend all sessions. But those that we did catch, were notably all high quality and not just marketing pitches.
Are socks a predictor of sentiment?
Colourful socks seem to be out, replaced with dark or at least mono-colour. I am not sure if this is seasonal or if it reflects a tough macro environment, but it did seem to reflect a more sombre / reflective mood.
Going forward I will pay more attention to this possibly overlooked indicator and look out for correlation and causation.
Before diving into some of the detail, here are my key take-aways
- There is highly likely much more risk embedded in the portfolios of both GPs and consequently LPs than we may think.
- The current investment landscape is fraught with heightened uncertainty due to a myriad of risks, including geopolitical tensions, elections, trade disputes, economic fluctuations, and currency volatility.
- GPs must adapt their strategies to navigate the complexities.
- LPs, especially the larger more sophisticated investors, are pivoting their portfolios closer to home, seeking better risk-adjusted returns.
- Delayed distributions are significantly impacting re-ups. This has been particularly noticeable in the ‘retail’ segment, where returns have fallen short of expectations and promises.
- There is a shift in allocations, with increased interest in private debt and secondary markets.
- The mid-market has been good for LPs, offering opportunities in late primary investments and co-investments.
- European General Partners (GPs) are increasingly specialising by strategy and sector, aiming to build regional champions.
- The macroeconomic changes demand that GPs move away from reliance on leverage as a return driver. Instead, they must focus on robust value creation strategies, emphasizing governance, operational improvements, and strong executive teams.
- This shift underscores the importance of demonstrating tangible value creation to meet LPs’ growing expectations.
- Intra-vintage performance spreads are widening and the divergence among GPs is becoming more pronounced, raising the stakes in an already challenging environment.
Fundraising is currently facing its toughest environment in over 25 years. LPs are over-allocated (especially to Buyout and VC) and increasingly selective, cutting back even on established relationships (re-ups) as they grapple with stretched budgets and tighter targets.
The piggy bank is empty, or is it half full?
Exacerbating this, meetings with LPs are hard to secure, and those that do happen often focus on future funds rather than the current one.
GPs consequently must work harder to differentiate themselves and secure fresh commitments.
Superficial, generic product pitches don’t resonate in this climate; GPs need to show depth and alignment with LP priorities. I.e. know your customer!
The fundraising environment favours LPs
Given the above, GPs are now more responsive to LP inquiries than in the past. It used to be that GPs did not reply to emails from LPs (ghosting apparently goes both ways). Now, as fundraising pressures mount, LPs find it easier to gain access to sought-after GPs, shifting some leverage back in their favour.
In an environment where fundraises are so drawn-out, LPs are also more hesitant on being part of a first close.Not only because they can now afford to wait for a late close, while still assured they will get in and then benefit from the early investments. But also, because LPs are increasingly concerned about failed fundraises and the implications this may have on strategy and on the team.
Notably for GPs, several LPs mentioned this was now an important diligence point and a key consideration at ICs.
There are some early bird discounts trying to tempt LPs to commit to earlier closes. But these incentives have not changed much and, to be enticing for LPs, they must be both more meaningful and present a fair deal for LPs, not least if it is a re-upping LP.
The GPs must work harder: Performance is table stakes
LPs are looking for GPs who can deliver strong returns. But assuming you do get in the door, performance alone is not enough. LPs also demand transparency, credibility, and nuanced market understanding.
GPs must in turn deliver a well-differentiated, transparent, and scalable offering that not only meets LPs’ financial expectations but also aligns with their evolving focus areas.
This requires GPs to build / set up their organisations to be able to deliver these things. This will likely squeeze the smaller GPs favouring those with scale – more on this in another post.
To raise their funds GPs increasingly need to be able to go ‘global’ in their fundraising. Seeing the usual suspects and the LPs in their home area is not enough. This, even with a good Placement Agent is a further challenge for GPs with small teams.
Finally, GPs must consider internal alignment on the implications of lower demand and prolonged fundraising timelines. It is essential to avoid challenges in team cohesion and strategy execution as fundraising windows stretch out. In other words, it may not be your fundraising team that is entirely responsible for lack of fundraising traction!
Stay Illiquid
Kasper Wichmann, CEO Balentic
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