Has private equity fundraising hit bottom?

After roughly two years of slowdown, has private equity fundraising found its bottom?

In the early months of 2024, market activity hit is lowest ebb in several years. According to Buyouts data released this week, North American private equity funds raised $88 billion of capital in the first quarter, down 34 percent from $133 billion a year earlier.

This represents the weakest capital inflows on a quarterly basis since 2022, when the downturn got underway. It also marks the first time inflows have fallen below $100 billion since the pandemic-roiled market of 2020.

In addition, the number of fund closings, totaling 276 in Q1 2024, reached their lowest point on a quarterly basis in at least five years.

Are we at the bottom? It is perhaps too soon to say. The original causes of slower fundraising remain stubbornly in place. In 2022, many LPs began to run out money, mostly because of macro factors that precipitated overallocation to the asset class. While this may be less of an issue today, LP liquidity constraints persist due to reduced distributions from GPs.

Matched against this supply shortage is robust demand from fund sponsors. Despite evidence that some GPs have elected to sit out fundraising until market conditions improve, strong demand has been a constant throughout the downturn.

A key manifestation of this supply-demand dynamic is longer timelines. In 2023, sponsors logged unprecedented time on the road, averaging 16 months to close their funds, according to Buyouts data. And the longer GPs raise capital, the more likely they are to trim targets.

So when will the private equity industry see a break in the logjam? The consensus view is when exit markets open up, allowing GPs to realize investments, distribute capital back to LPs and replenish allocation stocks.

At the start of 2024, some GPs forecast a revival in dealmaking – and, by extension, exits – later this year. This was rooted in part by optimism about imminent interest rate cuts, something Federal Reserve chair Jerome Powell poured cold water on last month. However, there are other reasons why M&A could pick up, including some narrowing of the bid-ask spread.

But if M&A revives, will exits automatically flow? Possibly not fully, some argue, because of structural issues impacting certain exit channels. Others, such as HarbourVest Partners managing director Scott Voss, are more hopeful. In a Buyouts interview this month, he said several factors can help unlock exits, including private equity’s record dry powder:

“This capital needs to get deployed, so transactions will happen. And that will be a good thing across the industry, as LPs and GPs wait for the exit gates to swing open.”

In the meantime, LPs are looking for other ways to generate liquidity, such as the secondaries market. GPs are doing the same as another means of realizing assets. Fund sponsors are also exploring non-traditional capital sources free of the liquidity constraints affecting traditional sources, such as overseas and high-net-worth investors.

But as important as these trends are, nothing replaces reinvigorated exit markets. Until this happens, private equity fundraising may experience a few more quarters like Q1 2024.