As the PE market tightens, TA pauses fundraising on double-down fund

As growth gets muted, and LPs pull back on their commitment pacing, certain strategies may be out of favor.

In the challenging fundraising market, GPs are having to adjust expectations, extending plans for keeping funds open, and some may need to face the tough reality of closing below target, something many firms haven’t had to think about for years.

Other signs and signals will likely emerge the longer the fundraising drought continues. One recent example involves TA Associates, which has decided to pause fundraising on one of its newer strategies.

The firm recently launched fundraising on its 15th flagship pool and its third Select Opportunities fund. TA recently informed limited partners that it was pulling the third Select Opportunities fund to focus solely on the flagship pool.

“We have decided to pause the fundraise for TA Select Opps III and focus on TA XV and our flagship fund series moving forward. We believe this will reduce organizational complexity and are excited to address these investment opportunities on a selective basis, as we have been, through our flagship fund series,” according to TA’s communication with LPs.

It’s not clear if the firm intends to bring the third Select Opportunities fund back to market at a later time. A TA spokesperson declined to comment.

Select Opportunities Fund III was targeting $1.5 billion. TA anticipated holding first closes on the new fundraising around the end of March. The flagship pool is targeting around $15 billion and could end up raising more than $16 billion, according to a limited partner who has backed TA funds.

Riding growth

The double-down strategy, pioneered by TA, focuses on reinvesting back into certain portfolio companies that the firm is selling that have already met return expectations. The rationale is for the firm to keep minority stakes in certain portfolio companies as they continue to grow, even after exit.

Insight Partners also has raised a double-down fund that was specifically tied to its 10th fund. Insight’s fund is tailored to the firm’s specific strategy, which focuses mainly on taking minority stakes in businesses, rather than acquisitions for control. The firm saw the need for the fund because it deployed Fund X quickly with not much in reserve to invest into subsequent funding rounds, Buyouts previously reported.

The funds don’t charge LPs management fees, but do collect fees from portfolio companies, according to TA’s Form ADV. The funds charge 20 percent carried interest rate. TA closed its second Select Opps fund in 2021 on $1.5 billion, and its debut Select Opps pool in 2020 on $1 billion.

The strategy comes with risks, as TA outlines in the Form ADV, including the challenge of generating high returns on companies that have comparatively higher enterprise values than those that the main fund targets. “The possibility of generating breakout returns is less likely,” according to the Form ADV.

Other risks include potential conflicts of interest with third-party investors that already have a relationship with TA through prior investments; a potentially limited number of opportunities, especially considering each deal would require a third-party lead investor; and TA’s reduced influence on the investments as a minority investor.

Fatigued investors

It’s not clear exactly why TA chose to pull the fundraising. Sources said the Select Opportunities fund received a less enthusiastic reception than expected. And, the firm may be facing “LP fatigue, which is impacting even GPs with strong past performance. There’s fatigue because ‘Hey, you guys are back, we have a lot of NAV with you and we can only do so much,’” a family office LP told Buyouts in a prior interview.

LPs generally are under pressure from overexposure to private equity, as their public holdings fall in value. And, they are seeing less cash flow from the PE portfolios as exit activity slows. This leaves many LPs with much less flexibility for new relationships or ancillary strategies formed by their existing managers.

One source said the double-down strategy is a relic of the high-growth era that seemingly ended with the Federal Reserve’s monetary tightening to combat escalating prices. As growth gets muted, and LPs pull back on their commitment pacing, strategies like Select Opportunities may be out of favor.