Private equity fundraising is slow – but it’s also at record levels

Since early 2022, clouds have formed over private equity fundraising, with forecasts routinely predicting continued dark skies.

Results last year confirmed a downward trend. A total of $559 billion was raised by North American private equity funds, down 9 percent from a year earlier, according to Buyouts data. Fund closings declined 17 percent over the same period, hitting a five-year low.

Some have described the market as the worst ever. It certainly is the slowest since the financial crisis. The virus-roiled market of 2020, which saw a bigger dip in capital inflows, at least recovered quickly. By 2021, fundraising was again surging.

The causes of almost 24 months of slowdown are well-known. Along with macro factors, many LPs ran out of money, first due to overallocation but with weak distributions increasingly playing a key role. With GP demand remaining strong, this created today’s familiar dynamic.

But there is another way of looking at fundraising data, a way that speaks to a positive outlook for private equity in the long-term.

For one, the $559 billion secured last year is the third-largest infusion of capital into the industry on record. The largest was in 2022, when $611 billion was raised. The latter year benefited from a spillover of 2021’s robust activity, with signs of a downturn mostly seen in fund closings.

In fact, nearly $1.2 trillion was raised by North American private equity funds over 2022-2023, up 14 percent from the combined haul of the two prior years.

Further, the past two years sustained a mostly unbroken pattern of bringing more than $500 billion into the industry annually, begun in 2019.

While a challenging demand-supply dynamic is expected to persist in 2024, there are again reasons to be hopeful. A revived secondaries market, for example, could soon provide much sought-after liquidity to LPs, helping to restore the flow of commitments.

In addition, though some LPs have cut back their private equity exposure of late, survey after survey indicate institutional enthusiasm is undiminished. A BlackRock survey last year found 72 percent of respondents planning to grow their allocations.

There is also fresh supply opening up to the asset class. The downturn forced GPs to be creative and look beyond their traditional LPs, an effort that uncovered new institutional sources, especially in Asia and the Middle East.

More significant in time may be the greater attention paid to high-net-worth investors. Only a fraction of the trillions held by them is now being tapped by private equity, something GPs aim to change by allocating resources to private wealth channels.

So, while private equity fundraising is slow, the picture is not entirely bleak. And as the clouds lift, an even stronger market might emerge.