Less than two years ago, the start of the covid-19 pandemic briefly seemed to threaten the global economy with wholesale collapse. Few then could have predicted that the Private Funds CFO Insights Survey 2022, conducted in partnership with TMF Group, would highlight a market boom on a scale that has driven fundraising to unprecedented levels and attracted a host of new players to the market.
“Investing is coming back at even higher levels than pre-pandemic,” says Kwame Lewis, co-head of fund services, North America at TMF Group. “There’s more of everything – more funds being raised, more new entrants coming into the market, more dollars chasing fewer investment opportunities.”
The survey results certainly support this robust assessment. Some 73 percent of respondents expect their firm’s next fund to be larger than their current vintage, compared to only 62 percent who said the same in last year’s survey. Less than 6 percent of respondents expected their next fund size to be smaller.
Prior to this year, the proportion of respondents who told us that they were currently fundraising had flatlined at around 30 percent since 2018. This year, however, this figure hit close to 40 percent. And almost 10 percent of our survey participants are raising their first fund – far above the 3 percent who were in the process of raising an inaugural fund last year.
The fundraising boom undoubtedly reflects the strength of certain segments of the US economy, with high-net-worth individuals in particular enjoying a notable growth in their assets since the start of the pandemic. “People that have a lot of idle wealth are looking for alternative asset classes to diversify,” says Joshua Cherry-Seto, CFO at Blue Wolf Capital. “I don’t see that slowing down in the near term. It’s certainly driving fundraising these days.”
“Investing is coming back at even higher levels than pre-pandemic”
Jeff Lucassen, CFO and COO at Northleaf Capital Partners, agrees that the strength of market sentiment in the private funds sector correlates with macroeconomic conditions. “Public markets are very buoyant as well,” he says, which is “driving up the overall value of investor portfolios.”
“Institutions are disciplined and want to keep their asset mix well-balanced. We expect that the prospect of continued volatility in the public markets will drive increased interest in private markets for investors seeking returns generated through long-term, patient value creation strategies.”
Despite the booming market, fundraising itself is never straightforward. The share of respondents who rated the task of finding new investors as a major challenge increased marginally from last year. On the other hand, respondents were more sanguine this year about raising capital with limited face-to-face contact – a trend that seemingly reflects the greater familiarity with virtual meetings, along with a gradual return to normal working practices as the pandemic begins to wane.
Experimenting with strategies
Although almost eight out of 10 respondents said they would not change their investment focus, a significant minority did reveal an intention to focus on new sectors, regions or asset classes.
It is already commonplace for firms to look for investors outside North America. Almost half of respondents said they market in Europe, with a further 30 percent planning to do so in the future. Six out of 10 firms in the survey already market in the Asia-Pacific region or have plans to do so. Other emerging markets are also of interest to firms seeking new investors, with one in four planning to market in Latin America and almost one in five looking to the Middle East. Africa is the only region that remains largely ignored as a potential source of investment capital.
A CFO at a lower mid-market private equity firm told Private Funds CFO that their firm had tripled the amount of capital raised from overseas in its most recent fund and would continue to expand overseas fundraising. “Even firms that are oversubscribed like to have a broader choice of investors,” says this source, adding that “demand from Europe seems to be growing.”
“People that have a lot of idle wealth are looking for alternative asset classes to diversify”
Blue Wolf Capital
Our survey respondents agree. Some 52 percent expect European LPs to increase as a proportion of their investor base in their next fund, with just 3 percent expecting the region to decline as a source of investment.
US firms entering the European market will have to contend with significant regulatory challenges, however. The EU’s Sustainable Finance Disclosure Regulation, which is in the process of entering into force, was rated as ‘very’ or ‘a little’ challenging for premarketing and marketing in the EU by 75 percent of respondents.
Cherry-Seto did highlight that investors may ultimately expect US firms to adopt similar practices to those mandated in European regulations on ESG in any case. The SFDR, he says, is “consistent with the pressure we’re getting from other sources about publishing our ESG policies and making disclosures on our website.”
New asset classes tricky for smaller firms
Of those planning to enter a new asset class, meanwhile, there was a significant rise in firms intending to focus on buyouts, private debt or real estate. Fewer firms, however, intend to focus on distressed debt. The rise in firms that plan to expand into new asset classes was surprising to several of the industry figures who spoke to Private Funds CFO about the survey results.
A number of sources expressed skepticism over the wisdom of firms, especially smaller players, straying too far from their areas of expertise in an effort to attract investors.
Looming in the background is the question of whether the current surge in fundraising activity is sustainable. The consensus among the CFOs we consulted is that conditions will remain positive throughout 2022, and perhaps for much longer. It is hard to find anyone who believes a 2008-style crash is lurking round the corner.
Ultimately, now may well be a good time for new players to fundraise, but their longevity will depend on their success in actually managing their newly launched funds. As the CFO of a technology investment firm pointed out, “at some point there will be a contraction in the market – and only the top performing managers will be left standing.”