Target-hitting a bright spot in 2022’s private equity fundraising

A piece of good news in last year’s otherwise slow private equity fundraising market was the rate at which GPs were meeting their targets.

In fact, more sponsors closed funds at or above their targets in 2022 than they did in prior years, including the record-breaking 2021, according to Buyouts data.

Of all funds closed, 89 percent either hit or exceeded targets, up from 85 percent in 2021 and 75 percent in 2020. Offerings meeting their targets accounted for 62 percent of the 2022 total, the highest share recorded since 2017.

Funds beating their targets, such as Advent International GPE X, Thoma Bravo Fund XV and KKR North America Fund XIII, made up 27 percent of the total. This roughly corresponds with the results of prior years: down slightly from 2021, but up slightly from 2020.

Conversely, fewer sponsors underperformed last year. Only 12 percent of funds were wrapped up below target, down from 15 percent in 2021 and 25 percent in 2020.

Target-hitting, then, was one of the few positive indicators of capital raising last year, according to Buyouts’ Fundraising Report 2022, published this month.

With $528 billion raised across the North American market, inflows were high by historical standards in 2022. But when you dig deeper into the details, another story emerges.

For starters, while inflows were substantial, they began to drop-off after the first quarter. A robust $152 billion was collected in Q1 2022, perhaps reflecting a spillover from the giddy heights reached in 2021. By the fourth quarter, however, activity had fallen to $122 billion.

The dip tracked a key shift in demand-supply dynamics. Economic uncertainty, prompting a nosedive in public market valuations, left many LPs overallocated thanks to the denominator effect. As 2022 progressed, this and other factors led to tighter supply conditions.

Many GPs responded by slowing the pace of their capital raising. Sponsors took an average of 11.2 months to close their offerings last year, the longest fundraising timeline since 2010, when private equity was recovering from the financial crisis.

Longer timelines help explain the sharp decline in fund closings. In all, 988 offerings were wrapped up in 2022, down 29 percent from a year earlier.

Target-hitting might be a lagging indicator of fundraising. Amid expectations that market challenges will persist or worsen in 2023, some GPs are today expressing concern about getting to the finish line.

“It’s too early to tell whether we’ll hit all those targets or not,” TPG CFO Jack Weingart said in the firm’s year-end earnings call.