There is a scenario being discussed in the private equity market these days. It goes something like this: Some LP institutions, such as public pensions or family offices, hit their annual allocation targets by Memorial Day, leaving very little, or even nothing, for funds that come out later this year.

The rapid commitment pace is due mostly to LPs’ existing managers coming back to market with successor funds, and new products, at a pace faster than ever before. In the past, a private equity buyout manager would be expected back with the successor fund every two to four years. These days, some managers are coming back in a year or less after closing the prior fund.

Look no further than Hellman & Friedman, which closed its largest-ever pool, Fund X, in July 2021 on $24.4 billion. The firm began pre-marketing its 11th fund around the spring of this year, Buyouts previously reported. TA Associates is another firm expected to launch its next flagship this year after closing its largest haul for Fund XIV in June 2021 on $12.5 billion, a source tells us, confirming a report in The Wall Street Journal.

And Thoma Bravo, targeting more than $28 billion across three funds, returned to the fundraising market last year after closing its previous fundraising round in 2020.

“We’re definitely stung by the allocation issue,” the head of private equity at a large LP says. “We had to cut a lot of managers – we had too many people out fundraising. We cut some people back, or out, because of too many funds in the market.”

Tough choices

It’s a chaotic fundraising market, and one that is changing the way private equity works. Emerging managers, for example, are having a much harder time getting noticed and earning their way onto an LP’s portfolio. Firms with any sort of performance issues have a much tougher time getting back on LP radars.

Todd Silverman, Meketa Investment Group

LPs are having to figure out how to free up liquidity to remain in the game – essentially, as they reach their allocation caps and spend their money for the year, they need to find more capital to back incoming funds later this year. Part of the problem is that distributions have slowed, and without money coming back from the existing portfolio, LPs need to find liquidity to re-up with those same managers.

Some are boosting allocation targets, some are selling on the secondaries market and some are making the tough decision to hold off and potentially miss the next fund from their favorite managers.

“I think this was the year of tough choices anyway, given the volume of activity in the fundraising environment,” says Todd Silverman, managing principal with Meketa Investment Group.

All these market dynamics have created a situation where LPs are slowing their commitment paces, but GPs haven’t yet caught on, according to an LP at a large public pension system. “It’s not clear that the GPs have gotten the picture totally that the LPs are slowing down,” the LP says.

“We’re definitely stung by the allocation issue. We had to cut a lot of managers – we had too many people out fundraising. We cut some people back, or out, because of too many funds in the market.”

Head of private equity at a large LP

In general, several market professionals say they expect fundraising to slow as the year progresses.

“Primary fundraising volumes in the aggregate will probably be down in 2022,” says Eric Zoller, founder and partner of Sixpoint Partners. “Top performing funds are continuing to attract capital; even if they are taking longer, they aren’t raising less money.”

“I’m encouraging it, if you’re not out of capital,” Silverman says about pushing fundraising to 2023. However, some shops may be motivated to bring new funds to market this year out of fear that LPs will start pulling back from committing to the asset class because of over-allocation issues. “A number of these processes will probably need to slip into next year.”

KKR’s rise

It’s become challenging for us at Buyouts to keep track of fundraising as the numbers are constantly in flux (which is always the case, but the pace has picked up greatly). A firm in the top 10 last year might drop way down into the top 20 or lower this year (Neuberger Berman, for example, went from No. 8 last year to No. 30 this year), only to rocket right back to the top five next year as funds get raised at a quick pace.

This year, KKR has come out on top as the largest firm based on fundraising over the past five-year period. The firm closed its largest fund ever, collecting $19 billion for KKR North American Fund XIII. A few firms have fallen several slots since last year, but it’s hard to make a judgment about that because the likelihood is those firms will climb back up the ranks next year as they continue raising funds.

This is especially true for firms like TPG, which dropped to No. 16 from No. 6 last year, and Vista Equity, which dropped to No. 11 from No. 5 in 2021. Both firms are raising their flagship pools, while TPG also is raising a healthcare-specific fund.

What is driving the fundraising cycle? Why has the pace picked up so much from only a few years ago, when the industry operated at a pace that seems quaint these days?

Part of it has to do with the largest, strongest-performing firms vacuuming up more and more allocation from limited partners. This is a sort of consolidation of LP capital around the biggest firms, which has only become more pronounced as those firms have gotten bigger, which for many of them has included launching new, ancillary products.

LPs, as well, have demanded more private equity. This includes those that already invest in the asset class, but also new entrants into the market eager to build meaningful exposure. Take Kaiser Permanente, a healthcare provider and nonprofit health plan, for example. The system quickly ramped up its PE program, starting in 2019, when it brought on Anton Orlich as head of alternative investments. The system rocketed from $6 billion in private equity NAV in 2019 to $33 billion last year, according to Private Equity International. Kaiser committed $12 billion alone in PE last year. Its portfolio is split among buyout, growth/venture and credit, and it invests in emerging managers and has anchored first-time funds and makes co-investments.

That pace of growth is unusual for LPs, which usually plan for growth over a number of years, taking into consideration time for underlying investments to mature and for funds to deliver liquidity through exits.

But it’s an example of the kind of demand institutions have for private equity to meet their obligations.

As well, distribution has outpaced contributions for many years, which has kept fundraising humming along smoothly. It’s this type of self-perpetuating system that has allowed private equity fundraising to thrive, but as the economy hits a rough patch (and is potentially heading for recession), M&A activity is slowing, which means exits are down, and that means distributions are already, or will be, slowing down.

With less capital to feed back into the PE machine, fundraising will likely calm, at least from the frenetic pace it’s been at over the past decade. Maybe that’s not such a bad thing, considering the frustration LPs privately express when asked about what fundraising is like these days.

Buyouts 100 spotlight on…

General Atlantic
Rank: 5
HQ: New York

Growth equity pioneer General Atlantic enters the top five of the Buyouts 100, as LPs pour dollars into the digitalization-fueled strategy, writes Kirk Falconer.

Launched in 1980, General Atlantic was a top fundraiser last year, amassing $7.8 billion for a sixth flagship growth equity vehicle, above a $5 billion target. But that was only part of a total haul of $17 billion, gleaned across the firm’s broad capital base.

Alongside flagships, General Atlantic raises five-year and evergreen managed accounts, tapping into a range of LPs. It is also expanding into new adjacencies, in 2020 forming Atlantic Park, a growth-oriented credit fund, and in 2021 forming BeyondNetZero, a growth-oriented climate fund.

In addition, the firm last year closed a debut continuation fund to create more time and capital to grow prized portfolio assets. The $3 billion-plus pool, led by Ardian and HarbourVest, backs four companies: Howden, Argus Media, Sanfer and Red Ventures.
General Atlantic’s success on the fundraising trail highlights the momentum behind growth equity, which is today rubbing shoulders with buyouts as one of the most popular asset classes with LPs.

Growth equity, for example, has shed a once exclusive focus on North American dealflow. It is now global in scope, co-president Anton Levy tells Buyouts, because “the world is catching up with growth.”

Veritas Capital
Rank: 29
HQ: New York

Veritas Capital invests in technology-focused companies that operate in government-influenced and regulatory-driven markets, writes Gregg Gethard.

According to CEO and managing partner Ramzi Musallam, Veritas is guided by a mission to leverage technology as a positive force to effect change in three critical areas that impact all Americans – healthcare, education and national security.

And it has been incredibly active in this space. Currently, Veritas is looking to raise $8.5 billion for its eighth fund, all while making two major transactions within the past year.
Fundraising is brisk, with the firm earning a $250 million commitment from Oregon State Treasury, a $125 million commitment from Los Angeles County Employees’ Retirement Association and a $125 million commitment from Pennsylvania State Employees’ Retirement System, among others.

Veritas Capital acquired learning technology company Houghton Mifflin Harcourt in February, purchasing the company’s shares at an implied value of $2.8 billion, according to a press release.

Veritas also made headlines in November when it sold health records company Athenahealth in a $17 billion deal that generated a 10x return. Veritas closed on its seventh fund in 2019 on $6.5 billion; Fund VI closed on $3.55 billion in 2018.

K1 Investment Management
Rank: 61
HQ: Manhattan Beach, California

K1, which invests in B2B and enterprise software companies in the lower-mid-market, typically in sectors like financial services, legal, healthcare and cybersecurity, has been working on a process to move assets out of an older fund and into a continuation pool for more time and capital to run its investments, writes Chris Witkowsky.

The deal could total $3 billion or more, though it’s unclear if details of the deal are changing in the volatile markets, which have shifted dramatically since the beginning of the year.

One of the largest assets in the deal is Smarsh, which provides hosted services for archiving email, instant messaging and social media platforms. Smarsh is an example of the kind of investments sought by K1, which was formed in 2010 by a group that came out of Kayne Anderson Capital Advisors.

The firm closed its most recent fund, K5 Private Investors, last year on more than $4.5 billion. As of December 31, 2021, the firm managed about $13.1 billion, according to its Form ADV.

K1 is led by CEO and principal owner Neil Malik. The firm’s other founders are managing partners Hasan Askari and Taylor Beaupain.