Capital Crunch: The Challenges and Potential Solutions for Replenishing Dry Powder

November 06, 2023

Key Takeaways

21% say their biggest challenge in replenishing dry powder is competing against the largest and most diversified GPs

The pursuit of raising capital has become more arduous and requires a creative approach. As institutional investors rationalize the number of their relationships and in some instances downsize commitments, and the U.S. SEC introduces potential fundraising challenges with its new private fund rules, firms are turning their attention to the retailization of alternative investments as a previously untapped reservoir of investor capital.
It will be important to evaluate the impact of this strategy shift as it relates to fee structures, and an increased need of administrative capabilities.

Respondents in the 2024 Global Private Equity Outlook report share that the biggest challenge they currently face in replenishing their dry powder is competing against the largest and most diversified GPs, cited by 21% overall. This is of most concern for North American respondents (27%), a market in which investors seeking exposure to the U.S. are spoiled for choice. Marquee PE brands have continued their climb to the top of the fundraising leaderboard over the past decade, benefitting from their vast economies of scale. Perhaps the most notable of these is Blackstone, which in July 2023 reached a record US$1 trillion in AUM.

These findings echo last year’s results, when 20% of GPs overall shared this as their top fundraising challenge. However, in a departure from our previous report, when 28% pointed to LPs concentrating their investment relationships to a smaller number of funds as a top challenge, only 16% now flag this manager- relationship consolidation as a key issue, with APAC GPs being the outlier at 30%.

It appears that, on balance, GPs are less concerned about losing large, often cornerstone investors outright, but worry that these institutional backers are now dialing back on their ticket sizes. Last year only 4% highlighted institutional investors downsizing commitments as a top challenge, and this has now risen to 17%. Notably, as much as 20% of EMEA respondents are concerned by this, from as little as 3% a year ago.

A further potential fundraising obstacle as of August 23, 2023 is the Securities and Exchange Commission’s (SEC) new private fund rules. Among other obligations, these require that GPs enhance disclosures around fees, conflicts of interest and investment strategies, and avoid giving investors preferential treatment that would negatively impact other LPs. Fund managers preparing to launch new funds should carry out a risk assessment by seeking legal advice on whether their current private placement memorandum documents align with their existing practices, to ensure compliance with the new rules.

Footnotes

The preceding article is an excerpt from the 2024 Global Private Equity Outlook report, an annual publication that uses qualitative and quantitative findings to look at current PE industry trends and views on where the market is heading in 2024.