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Fund sizes surge in 2021 as LPs back bigger managers

Investors put safe money with larger managers, making fundraising for first-time funds more difficult.

Private capital funds raised more than $1 trillion in 2021, fueled by the global economic recovery, low interest rates and increasing market confidence, and there is no sign of activity slowing down this year, according to a report from SS&C Intralinks.

The report, “Alternative Allocations: The Future of Fundraising,” said that private equity managers used virtual fundraising technologies to boost their efforts.

Investors are also still swelling their allocations to private capital, with 80 percent of limited partners (LPs) having a positive view of alternative asset allocations, as their portfolios had met or exceeded expectations.

But while these factors are fueling bustling activity, investors are showing a preference for established managers launching successor funds, making fundraising challenging for emerging managers.

The SS&C report noted that last year, more experienced fund managers closed funds than emerging fund managers. Median fund size across private capital investment strategies surged to a record $130 million, but most managers are sticking to fund-size ranges that align with their previous vehicles, as illustrated by the fact that when plotting out fund sizes relative to total assets under management, most funds were clustered around the AUM axis, without surging across the fund-size axis, the report noted. Venture capital funds made up almost half of total fundraising, SS&C said.

This trend is likely to continue, said SS&C. While money continues to pour into private capital strategies, investors are likely to keep prioritizing experienced fund managers with enough scale to continue deploying capital despite high valuations and deal multiples. With record amounts of capital overhang, managers will need to deploy enormous amounts of dry powder into this inflated environment, also reinforcing an investor preference for experience and discipline.

Managers will also need to work harder for their money, SS&C predicts. Investors may prefer experienced managers right now, but the overall primary source of recent significant outperformance is the long bull market in equities, the firm said, pointing to a surge in one-year horizon IRRs, which for private equity was calculated in the high 40 percent area.

“From there, significant compression occurs, which, as public equities continue to outperform, means fund managers will have to work even harder to justify their fee loads.”