Private fairness fundraising slides as sector’s downturn deepens | USAEMALL.com

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Private equity firms are struggling to raise money despite offering unprecedented enticements to attract new investor cash, underscoring a sector-wide contraction that is denting the profitability of the industry.

Private equity groups raised just $592bn in the 12 months to June: their lowest tally for seven years, data from Preqin show.

The decline came even as firms offered more discounts such as management fee cuts, “early-bird discounts” for investors who commit quickly to new funds and other incentives.

They “are offering a smorgasbord of discounts”, said Marco Masotti, global head of private equity fundraising at law firm Paul Weiss, who added in a report by the firm that PE groups were “facing mounting fee pressure and agreeing to a cascade of discounts”.

The industry’s fundraising has shrunk by nearly a third from its record levels in 2021. Higher interest rates and a slowdown in dealmaking have left firms unable to sell trillions of dollars in ageing investments, causing growing frustration from investors, many of whom are now refusing to back funds.

Accentuating PE’s challenges are a flurry of newer entrants into the industry in the decade after the 2008 financial crisis, leaving the market oversaturated. It had left a record number of funds chasing every potential dollar of new investment, consultancy Bain said in June.

“There are just too many private equity managers seeking capital out there. I just don’t know how else to say it,” said Masotti.

As a result, more groups are offering discounts, such as pledging to return the transaction fees that were once charged to their clients, as well as volume-based discounts and novel terms such as caps on some legal and travel expenses.

These types of enticements have reduced net management fees paid to PE groups by about half since the global financial crisis, Bain & Co. found.

Industry leaders had hoped for a resurgence in dealmaking this year, with the slowdown rooted in firms’ inability to return cash to its investors. PE groups only returned 11 per cent of the industry’s assets to investors last year, the lowest figure since 2009, Bain calculates.

“After three years with a lack of liquidity, the rule book for fundraising has been fundamentally rewritten,” said Richard von Gusovius, global co-head of distribution at the private capital advisory Campbell Lutyens. “The investors really want their money back.”

Dealmakers had anticipated that, following a post-pandemic slump in deals and fundraising, President Donald Trump’s election combined with deregulation would lead to a revival of activity.

“That acceleration hasn’t materialised the way we had expected,” said Gabrielle Joseph, a managing director at Rede Partners, a private equity fundraising advisory firm.

The challenges facing the private capital industry were exacerbated by Trump’s tariffs, which chilled activity around the end of the first quarter.

A Campbell Lutyens survey in April found that 33 per cent of limited partners aimed to slow their private market investments in the wake of Trump’s tariffs, while 8 per cent were opting for an all-out pause.

In Europe, the sector’s difficulties are exacerbated by the fact that several PE firms are fundraising simultaneously.

Advent International was seeking more than $25bn for its new fund, Permira was targeting about €17bn for its latest flagship and Bridgepoint was expected to seek roughly €8bn, according to people familiar with the matter.

The people added that BC Partners was seeking €5bn for its latest fund, and that the mid-market focused investment group Inflexion was targeting close to €3bn-€4bn for its new fund. They added that Astorg was expected to target about €4.5bn for its next vehicle.

Advent, Permira, Bridgepoint, BC, Astorg and Inflexion all declined to comment.

“Right now it’s super crowded in the European market in a way I haven’t seen before,” said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

Some firms had postponed their fundraising to this year in the hopes of better conditions, she added. “All the ones with delayed fundraises, which are many, they wanted to go after US elections,” she said. 

A Raymond James report from July showed that about 1,500 buyout funds are aiming to raise $474bn in new funds. However, advisers warned that some funds would not be able to reach their goals as institutional investors slow their new commitments.

“[Investors] are looking at each opportunity with a bit of a kind of cool head,” Joseph at Rede Partners said. “The biggest thing that they’re really looking at is [whether] this manager . . . [is] fit for the future.”