Established PE Fund with a Stepdown in Fund Size?

The answer is probably what you expected but it's not what you want to hear: it just depends. Some firms have weathered their previous hiccups and come out just fine. Others have crumpled and never raised another subsequent fund. Fundraising for PE firms is a tricky and nuanced process and more and more firms are being exposed for their historically lackadaisical capital raising & IR efforts in this tough environment. There's another thread floating around here about all the firms struggling to fundraise. As you'd expect, most of what you read in the news are the few standouts and firms lucky enough to close on their target fund sizes (or even hard caps). What you don't usually see are the Onex-equivalents, where firms are nearly on the verge of collapse but still hanging by a thread of their historical legacy / halo effect. Below are some cherry-picked examples:

• Avista Healthcare: you may have seen headlines of their latest fund closing at $1.5bn, which sounds impressive. Guess what the size of Avista's inaugraul fund size was back in 2006? $2bn. The context is that Avista originally started out as an Energy & Healthcare firm, with energy/oil & gas side blowing up before their Fund IV. They've since re-oriented to be a healthcare-only fund since 2019, raising a few funds and rightsizing the ship. Performance has been all over the place, but when you focus only on their healthcare investments, they've been solidly 2nd quartile. I'd say generally speaking, they're in a better place than they were five years ago. Succession / key man is an issue though
• BC Partners: others can weigh in but a number of factors have contributed to the quiet dissoluton of BC. Lackluster IR team, political in-fighting, mediocre performance are all factors. I'm not sure where they stand on their latest fundraising but can't imagine it's a pretty picture there. If I were on the investment team there, I'd probably bounce. I don't see any signs of turnaround in the near-term and no new crop of leaders have stepped up to fill any perceived voids
• Kelso: their peak was around GFC, when they closed a $5bn+ Fund VIII. They just closed a Fund XI at $3.25bn. And that was after 2+ years of being in market. $400m came from the investment team. That's an absurdly high GP commit. They'll say it's because they really believe in their fund and portfolio companies. Others would say it's because they couldn't fill the gap to their original target fund size. I would heavily categorize Kelso has an oversized family office at this point. Can still get your training there but I'd be worried whether there are enough senior seats / roles to step into going forward
• One Rock: previously a darling of the value / industrials & business services space, they've really struggled to fundraise. They have 3 prior funds and Funds I and III are 1st quartile while Fund II is struggling. They're in market raising Fund IV and haven't even hit half of their prior fund's sizing. Now, this isn't entirely surprising as LPs always underwrite GPs' funds on two funds prior...so if it's Fund IV that they're in market with, Fund II's performance better be pretty damn good. That said, with One Rock's reputation, team, and strong performance in its 1st and 3rd funds, they should have at least been able to cover the size of the previous fund, not struggle to even bring in existings. This to me signals underperformance of the IR team. If you keep existing LPs happy, even if your performance wavers a little, they'll give you the benefit of the doubt and re-up. Remember, LPs back managers that won't get them fired. They'd much rather support an existing GP that's meh on performance than a first-time fund with great historical track record. One Rock has also decided to expand their product offerings (raising a new small cap fund) and office footprint (opening a London office), both things that you can generally only get away with when you're absolutely crushing on performance. Not when you're in a position of weakness. Not sure if they can right the ship here. It's going to take a lot to win back LPs' trust as there's just so many other good players in this space already (and all are doubling their fund sizes, not halving them)
• TCV / Insight: two famed growth equity-oriented GPs that have gotten slammed by the blow-up that began in 2022 and persists today. Many of their funds are underperforming if not underwater. Both firms have been in market for forever raising their flagship funds. That said, if you're on the investment team, are you really going to jump ship because you don't think these firms will be around in a decade?
• WCAS: two...maybe even three successions later and this storied tech/healthcare investor is still soldiering on. Their fund sizes have been all over the place but most recently closed a $5bn fund. They'll say they have the strongest team yet at the helm (although recently encountering some issues with the FTC, who's suing them on their healthcare investments). I'd say this is another example of a firm where it's fine to stay for long term obviously

Given your situation, only you can make the call. It takes firms a long time to die. Some never do. Continuation funds, etc. will always extend the lifelines of firms and funds. I'd suggest staying in your seat at least 3-4 years and then taking stock. LPs can be forgiving if you demonstrate that you and your colleagues have truly learned valuable lessons from this challenged fundraising cycle / troubled funds. But if you don't pay attention to your capital partners, you're fucked. I can guarantee you that. In this day and age, outperformance is no longer enough. LPs know they can be picky now and will only back those managers that have shown them the proper TLC, been helpful thought leaders, and readily share pipeline/co-invest where appropriate. As long as you're mindful of this, it should be fine. But as with most things at these firms, it has to come from the top-down. If your CEO/managing partners/co-founders don't buy into the importance of keeping LPs happy, then man is it going to be a rough ride.