Alternative Investment Fundraising Trends

Rising interest rates, upheaval in the banking industry, and volatile markets – so far, 2023 has been a challenging year for investors. In this article, we’ll delve into the allocation trends that have dominated the first half of the year, explore expectations for fundraising in the remainder of 2023 and beyond, and examine the strategies investors are adopting to thrive in these uncertain times.

State of Play
Institutional money has become more challenging to attract in 2023. Several factors contribute to this shift. Firstly, institutional investors have seen lower distributions from their existing investments, leaving them with less cash to reinvest. Secondly, the so-called “denominator effect” has capped their ability to allocate additional capital to alternative investment strategies.

To counter these challenges, allocators are becoming increasingly selective. They’re narrowing their focus to key manager relationships, typically those with an extensive track record of success. According to Preqin data, private equity funds raised $444.65 billion in the first half of 2023, down 20.5% year-on-year from $559.02 billion in the first half of 2022.

In the current market climate, there’s a “flight to familiarity.” Allocators are seeking direct placements with managers boasting large existing assets under management (AuM) and strong track records. This preference for existing relationships has allowed established General Partners (GPs) to meet their fundraising goals, even amid market uncertainty. However, smaller and emerging managers are experiencing longer fundraising cycles, delayed new launches, and revised target fund sizes.

Looking ahead to the second half of 2023, Limited Partners (LPs) are likely to gravitate towards managers who have demonstrated strong performance and successful investments through previous economic cycles, including downturns like the 2008 global financial crisis.

Hot Topics
Towards the end of 2022, private debt garnered significant interest from allocators, and this trend has continued into mid-2023. With public market financing somewhat restricted and cautious bank lenders following the events earlier in 2023, borrowers are turning to private markets for compelling and flexible terms and structuring.

There’s also growing interest in distressed and special situation strategies, which are attracting attention as opportunities emerge across the capital structure. As LPs seek returns uncorrelated with inflation and volatility in public markets, real assets, infrastructure, private equity, and venture capital strategies remain attractive options.

Co-investment Strategies
Co-investment strategies are emerging as a popular and attractive investment approach for both LPs and GPs. The value of private equity co-investments involving sovereign wealth funds, pension funds, corporate investors, and family offices increased nearly 39% year-over-year in the first quarter of 2023 to $42.3 billion, according to S&P Global Market Intelligence.

In times of squeezed returns, the lower fees provided by co-investment vehicles offer LPs the opportunity to generate greater returns while exercising greater control over their investment portfolio. LPs are also drawn to the higher levels of risk management, with greater due diligence typically carried out on co-investment deals. For GPs, co-investments can unlock capital for deals when fundraising is slow and financing is tight.

Hybrid Fundraising
While the industry had to adapt quickly to digital fundraising tactics during the 2020-2022 period, the “death of in-person fundraising” following the pandemic has been overstated. GPs are now employing a hybrid approach, combining in-person and digital fundraising strategies.

In-person communication remains the most efficient way to build long-term, productive relationships between allocators and funds. However, allocators and fund managers are mindful of costs, making any in-person travel for conferences, events, or meetings intentional and value-driven.

In-person fundraising is particularly crucial for new and emerging fund managers. They must overcome the challenge posed by LPs’ “flight-to-familiarity” trend, which focuses on established managers with a strong return record. To do this, new managers must engage in face-to-face meetings to forge personal relationships with LPs.

Moreover, LPs are not only seeking forums to meet potential GPs but also to strengthen networks among other allocators. This networking fosters the sharing of insights, ideas, and, in the case of co-investments, returns.

The outlook for the investment landscape remains positive. In H2 2023, we expect GPs to return to the market in preparation for a refresh of allocations in early 2024. The most successful LPs and GPs will adapt to changing market conditions and adopt a more efficient and collaborative approach to allocation and fundraising, utilizing both online and in-person platforms to their advantage.

(Source: Funds Europe)

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