„Fundraising is still challenging for most funds,“ says Alexis von Dziembowski from the asset manager AltamarCAM. „After the recovery in 2021, there were again fewer funds that reached final closing in 2022. The total amount raised by the funds has also significantly decreased.“ According to Bain & Company’s „Global Private Equity Report 2024“ the industry raised $1.2 trillion in fresh capital globally in 2023. The buyout category alone attracted $448 billion—a decline of 60 percent compared to the record year of 2021.
Time is the death of the IRR
Last year, the total number of funds that had a final closing fell further, but the volume increased substantially because some megafunds raised record amounts. „This year, the picture is similar,“ observes von Dziembowski. „We see many LPs rallying around the big established names. However, the fundraising volume is not expected to reach the levels of 2023.“
Detlef Mackewicz from Mackewicz & Partner now sees a silver lining on the horizon, and declining interest rates could support this trend. „Every deal is financed with about 50 percent debt. The cheaper I can acquire debt, the more it naturally reflects in the returns.“ The consultant sees time as a factor that has significantly affected private equity managers in recent years. „The holding period for companies in the portfolios is extending, and fundraising periods are also dragging on.“
Consequently, fund durations are being extended beyond the originally agreed terms. Typically, private equity funds have a duration of ten years, with a maximum extension of two additional years possible. However, GPs are currently extending durations even beyond those two years. „The calculation formula for returns, the IRR, does not favor an extended time factor,“ emphasizes Mackewicz. „Time is therefore the death of the IRR.“
Denominator effect at play
The hesitance of LPs to make new investments in private equity funds is also explained by the denominator effect. According to the „Preqin Global Report 2024 Private Equity,“ a majority of surveyed investors feel the denominator effect in that they are limited in their ability to deploy capital. Some LPs even have to reduce positions as a result. This fuels the secondary market.
Moreover, private equity funds are closing closer to their fundraising targets, rather than—like in previous years—closing above target. According to Preqin, funds that closed in 2023 took an average of 21 months and achieved 103 percent of their fundraising target. In 2022, funds also took an average of 21 months to close, but GPs achieved 114 percent of their fundraising target during that time. Under these conditions, global private equity fundraising in the first nine months of 2023 amounted to $508.6 billion, which is just 45.8 percent of the total amount for the entire year of 2022.
While primary markets are weakening, secondary markets are showing more vitality. According to Preqin, the price dislocation between public and private equity markets has restricted transaction flow in the private equity secondary market. The market is ready for additional deal flow as some LPs need to reduce their private equity positions. Additionally, GPs are reliant on finding alternative ways to generate distributions to paid-in (DPI) in a challenging exit environment. LPs are increasingly basing their reinvestment decisions on DPI ratios rather than the IRR as before.
LPs will also hold back their returns on new investments in 2025. Almost nine out of ten LPs, according to the „Global Private Capital Barometer“ by Coller Capital, do not plan to reinvest their capital with their existing GPs in the next twelve months due to more challenging liquidity conditions.
Blockage in exits
Another symptom of the crisis in the private equity market: exits have significantly decreased, particularly due to the cautious IPO activities in the public equity markets. For the first nine months of 2023, the „Preqin Global Report 2024 Private Equity“ estimates the number of private equity-backed IPOs at 82. In the entire year of 2022, there were still 135, and both years are significantly below the 392 IPOs in 2021 when the private equity market was booming. Since then, exit activity has declined sharply, as has the capital flowing back to LPs, which they reinvested in new funds. Thus, the global value of private equity exits in the first nine months of 2023 did not exceed $232.4 billion, which corresponds to 55 percent of the total for 2022.
Currently, there are initial signs of normalization. „The exit climate really needs to improve significantly now,“ states Detlef Mackewicz. „An exit avalanche is to be expected because companies are piling up that should have been divested from the portfolio long ago.“ However, in many cases, the price expectations of sellers and buyers are far apart because the prices demanded, which were valid five years ago, no longer correspond to today’s reality.
For some GPs, this poses an additional challenge if they purchased the companies in their portfolios years ago at very high prices. How can they achieve such high value creation with their portfolio companies that they reach, for example, a 20 percent net return and a doubling of capital?
Therefore, many GPs are currently trying to make the companies in their portfolios fit. However, the weak economy makes it difficult for companies to achieve revenue and profitability targets. „Recently, the reports from GPs and their portfolio companies have still been solid and reflected high resilience,“ summarizes Mackewicz. „But at some point, it will come to a head, and it will be interesting to see how successfully the fund managers will be able to increase the value of their portfolio companies.“
Concentration …
As institutional investors hold back on new investments in private equity funds, GPs are looking for new capital providers in the market—and are finding them in the private wealth channel. Especially the large GPs are successful in fundraising from private wealth. KKR reports that 15 percent of the capital the company has raised in recent years comes from individual investors. According to a Preqin forecast, this share could rise to 30 to 50 percent in the coming years. The American asset management company Blue Owl Capital, which offers alternative investments, also announced that it has raised more through the private wealth channel than through the institutional channel.
The current success of large GPs in fundraising and the capital drought of mid-sized GPs can be seen in Preqin’s figures: Currently, 1,648 funds are in fundraising to raise a total of $1 trillion. Of these, 10 percent of GPs want to raise two-thirds of the capital. Also in terms of performance, recent Pitchbook figures indicate a resurgence of private equity funds with a volume of over $5 billion. They have outperformed their smaller competitors in recent returns—8.8 percent over one year until the first quarter of 2024—after they had shown underperformance in this category for five consecutive quarters following the outbreak of the pandemic and the low point in the fourth quarter of 2022.
At the same time, a consolidation process is beginning in the private equity industry. In June 2024, Commerzbank announced the acquisition of 74.9 percent of Aquila Capital. Already in February 2024, the Allianz Group, through its venture capital subsidiary Allianz X, entered into a partnership with Constellation Wealth Capital at the alternatives manager AlTi Tiedemann Global. In July 2023, Permira already acquired 40 percent of AltamarCAM, which was formed in 2021 from the merger of CAM Alternatives and Altamar Capital Partners as a pan-European private asset manager. The list could go on.
… and consolidation of the private equity industry
In addition to these sometimes spectacular participations, the circle of GPs is beginning to shrink. „I expect a gradual, silent consolidation process,“ says Detlef Mackewicz. „In the years 2025, 2026, and 2027, we will look into some funds and find that the achieved returns are not what was promised.“ Investors expect funds to prove how good they are, especially in tough times. The consequence of disappointing performance: one or another manager will quietly disappear from the market. At the same time, LPs are focusing on the shrinking number of above-average successful GPs.
It is less about the very large American companies, from which investors do not necessarily demand a 20 percent net return and a doubling of capital, but are also satisfied with a 12 percent IRR. Smaller and mid-sized GPs rely on offering new funds through which investors can maximize performance.
Dominikus von Nerée from the alternative asset manager ARMEN SAS observes both a progressing professionalization and institutionalization as well as a consolidation among alternative asset managers in Europe. „This is partly due to the long-term trend of maturation of the alternatives industry in Europe. In the short term, it is also related to the market conditions of the last two to three years.“ The trends are accelerating, especially in the small/mid-cap segment in Europe. „This segment is an exciting field for investments due to the sheer number of managers — we have defined around 1,000 relevant names in Europe.“
Specialization and sustainability
Dirk Wittneben from ARDIAN advises smaller GPs to act more sector-specifically. For generalists in the mid-market and smaller funds, it is becoming increasingly difficult to raise capital unless they have an outstanding track record. „Some GPs are setting up an additional long-term evergreen strategy alongside their core strategies. This is a sign that the PE market is becoming more mature and thus more differentiated. Additionally, companies must meet increasingly higher requirements regarding data basis and sustainability criteria for a GP to consider a direct investment.“
Kim Woehl from Montagu Private Equity sees the pressure from LPs, GPs, and EU regulation as the reason why private equity investors have quickly integrated ESG and sustainability criteria in recent years. „In the EU, companies must track and report emission data. Most funds conduct annual surveys with the companies and send questionnaires to collect data.“ Investors and companies use this for a joint view of risks and opportunities, to adapt their business models or new products to become more resilient. „Likewise, GPs and LPs are increasingly working together on unified methods of data collection to reduce reporting efforts and focus on the data that is relevant for investor decision-making.“
Dr. Guido Birkner ist Chefredakteur von dpn – Deutsche Pensions- und Investmentnachrichten. Seit dem Jahr 2000 ist er für die F.A.Z.-Gruppe tätig. Zunächst schrieb er für das Magazin „FINANCE“, wechselte dann als Studienautor 2002 innerhalb des F.A.Z.-Instituts zu den Branchen- und Managementdiensten, später zu Studien und Marktforschung. Von 2014 bis 2020 verantwortete er redaktionell den Bereich Human Resources in der F.A.Z. BUSINESS MEDIA GmbH. Seit Juli 2019 gehört er der dpn-Redaktion an.