A tale of two funds: How to gauge the fundraising market

As funds hit the market over the next few months, they will likely contend with what some sources have told me is 'LP fatigue.'

A big thing happened this week that might give you the wrong idea about the state of private equity fundraising. Don’t be fooled: it’s still a wretched market right now.

Thoma Bravo announced the close of its latest fundraising cycle, collecting $32.3 billion across three funds: its 15th flagship pool, which raised $24.3 billion; its fourth mid-market Discover fund, which closed on $6.2 billion; and its second small-cap Explore fund, which brought in $1.8 billion.

It’s an amazing haul, made all the more impressive because the final close comes at a time of slowing commitments on the part of limited partners. It would almost appear that Thoma Bravo was able to push through heavy macro headwinds.

And perhaps that says something about the state of the market – maybe fundraising isn’t as bad as we’ve been hearing (and that we’ve seen in data from affiliate title Buyouts).

But it’s important to remember a few things. Thoma Bravo started fundraising last year, and had collected more than $26 billion for the three vehicles as of May. Thoma’s haul is not evidence of a more optimistic outlook for PE fundraising; it’s an outlier.

The true test of the market today will be better reflected in the fundraising experience of firms like TA Associates, which is gearing up to raise its 15th flagship pool and a third select opportunities fund, targeting up to $16 billion for the two combined. See also: Hellman & Friedman, which signaled earlier this year that it would start raising its next flagship in this year’s second half, with an eye toward a first close in the first half of 2023.

As those funds hit the market over the next few months, they will likely contend with what some sources have told me is “LP fatigue.” That is, investors who have been re-upping to managers coming back at a quicker pace than ever before, with larger funds and even new products. Earlier this year, before the markets truly soured, an anecdote was going around that for every $1 of capital LPs have to commit, they have $3 to $4 of re-ups coming from their existing GPs.

These LPs are building big chunks of net asset value with specific firms, which is making it tougher for them to build new relationships, especially as distributions slow.

“There may be a little fatigue, not because the numbers aren’t great; fatigue because, ‘Hey, you guys are back, we have a lot of NAV with you, and we can only do so much,’” an investor told me.

This is leading LPs to push GPs raising new funds to be more definite about when they expect to launch successor funds. “We need a better sense of when you’re coming back, if you’re coming back in two years time, we’re cutting our allocation in half,” the LP said. “Pacing has been very poor by the industry.”

It’s tough to pin down exactly when a GP thinks they will need to come back with a new fund, but LPs are being a lot more cautious about those who have come back too quickly in the past. We’ll see how that sentiment plays out with funds like TA and H&F, which have enjoyed nothing but overwhelming demand for their products over the past few years.