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PitchBook: Mid-market fundraising environment ‘healthy overall’ but uneven

Certain strategies are seeing new heights of success in fundraising, but smaller generalized funds may have trouble competing, PitchBook says.

The fundraising for mid-market private equity funds is “healthy overall,” but uneven, said PitchBook in its breakdown of the US PE market in the first quarter.

For funds between $100 million and $5 billion, healthcare- and/or technology-focused strategies are pulling in the most capital, the report said, with more established managers seeing a greater edge. On the other hand, emerging and first-time managers, with some exceptions, are “having difficulty breaking through in this highly competitive fundraising environment.”

“Surprisingly, industrials-focused funds appear to be struggling to find traction with LPs despite the significant manufacturing investment that reshoring supply chains and decarbonizing the global economy will require,” the report continued.

Some mid-market players have seen an unusual level of success, though. Arctos Sports Partners is said to be nearing a 10-figure additional close on its second fund, after breaking a record with its first fund’s $3 billion in commitments, the report said. And first-time manager GrowthCurve Capital is looking for $3 billion for its debut.

“Multi-billion dollar first funds used to be a rarity,” the report said, “although we could see more in the coming years because there are more deep-pocketed LPs seeking to back emerging managers.”

PitchBook also noted that fundraising for the mid-market GP stakes sector is still going strong.

But mismatched supply and demand means smaller, generalist funds could have trouble fundraising in this environment, as the fundraising boom means consolidation of investment with established managers. “The largest LPs are being forced to prioritize $100 million [and larger] re-ups with veteran managers that have sat in their portfolio for years, if not decades,” PitchBook said. That could dry up what’s left over for other GPs, leaving those LPs with less available capital to commit and forcing those GPs to “reshuffle” their roster of LPs.

Smaller managers have fewer options to adapt. Delaying fund closing until next year to tap fresh capital then, or pursuing new sources of capital, like retail and family offices, could be viable tactics. But family offices in particular “may have significant bargaining power over the coming 18 months,” Pitchbook said. Firms can also increase balance sheet size and create new LP partnerships with management company stake sales, it noted. Private Funds CFO has also previously reported on increased demand for NAV-loan-style financing that can achieve similar outcomes without the dilutive effect of stake sales.