It will come as no surprise that PE fundraising throughout H1 2023 was 15-25% slower than the same period in 2022. This was widely anticipated as funds experienced back-to-back record-breaking years post-pandemic. In 2022 alone, US funds raised a record $377 billion.
According to Pitchbook, the biggest surprise of 2023 has been the turnaround in the middle market funds, which accounted for 57% of PE fund value closed in H1 2023, up from an all-time low during the pandemic. Middle market funds are vehicles that raise between $100 million and $5 billion.
And whilst the data is only available for the first half of 2023 but the middle markets climb to the top is nothing short of dramatic.
Megafunds
Whilst the middle market has been thriving, there is also a lot to be said about the megafunds and their activities in the first half of the year.
Over the past two years, megafunds have accounted for 47.2% of total fundraising. That share dropped to 41.7% through the first half of 2023. According to Pitchbook, this downtrend is likely to reverse in the second half of the year as numerous large funds that have been kept open by mega sponsors are poised to close.
Megafunds like Blackstone, Carlyle, TPG, CDR Vista and Warburg all have funds in the market that have been fundraising for the last year or so and have collected close to $100 billion in investor capital. However, whilst these funds are raising capital, it is flowing in at a significantly slower pace than it has during the past two years. Moreover, the likes of Carlyle and Blackstone have reduced their outlooks for performance. The combination of these two factors has resulted in the tempering of expectations of sponsors.
Middle market funds
As we discussed earlier in the article, middle market funds are experiencing a renaissance. They are outpacing their megafund counterparts in terms of performance and fundraising. Through the first half of the year, 92 middle market funds have closed with an aggregate value of $87.9 billion, putting it on track for its best fundraising year since the peak in 2019. It appears “Big fund fatigue” has set in, and investors are gravitating toward smaller funds doing smaller deals that are easier to close and finance in the current economic environment.
Alternative sources of fundraising
Traditional limited partners (LPs) in the US have remained constrained in their PE allocations, prompting GPs to explore alternative geographics, like Asia and the Middle East. Increasingly, GPs are also seeing these major LPs from these regions seek out co-investment opportunities on specific investments, allowing GPs to tap another funding source when financing is tight. Pitchbook cites French PE firm Ardian as an example of this strategy in action.
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26/09/23
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