Troubled fundraising processes

Wanted to start a thread listing funds that have troubled / stalled fundraising processes in the last year or so. Obviously a lot of the rockets through '21 have stalled due to performance, denominator effect, general environment, etc. But rather than trawling through PEI or googling name-by-name, can we list what funds have had iffy processes (delays, below-target closes, shrinking funds)? Both grapevine and publicly known would be cool.


Harvest: targeted $5.3bn, ended up having to try to fund it with tender/staples for LPs of old funds, had issues doing that too

Carlyle: delayed their next flagship (target $22bn) after trying to staple to the finish line

Apollo: keeping flagship open through H1 2023

Below target: BC Partners, Ares secondaries, DE Shaw (lol)

 

At this point it would be more efficient to list which funds HAVE reached their target funding, because everyone I've heard of outside of a couple of ultra high performing funds are having trouble raising. LPs are spooked. Denominator effect is kinda real, but it's more of a scapegoat at this point to not deploy capital in a time when valuations are all over the place and it's hard to trust past performance (i.e., name a solid fund that didn't return like 3x in the last 10 years, the market was on fire).

What's going to happen, imo, is that all of these convertible notes and brudge rounds are going to die out. Bad growth/venture companies are going to die because they can't get profitable. JAMMBOs and LMMs are going to hold onto assets and cashflow because multiples have fallen.

The aftermath is that a lot of smaller funds are going to die, and a lot of older/"blue chip" funds are going to raise less and shrink, both in AUM and people at the top. I believe you'll see a lot of consolidation and a lot of VP level and up moving into portco C Level roles.

The market has shifted. PE lags this because of the fund structure and time commitment, but the proliferation of larger funds raised and tons of small funds raising fund 2 or 3 is just... over. Put it to you another way: if you were an LP, would you trust the same  team to operate in a down market as a bull market? If you hesitate in your response, congrats, now you understand what LPs are thinking.

Remember, always be kind-hearted.
 

Awesome post (like so many of your others), this was very helpful context. To reach a conclusion based on your feedback, one could assume that joining a LMM / smaller MM PE fund as an Associate would be a pretty risky move at this time. I am seeing a lot of outreach right now and cant help but think it would be a rather risky career move (I am in a pretty stable role right now with limited risk of being let go, but have always thought about PE one day. 

I cant help but think that in the next 2-3 years the # of juniors at these smaller funds will shrink dramatically, no?

 

I imagine it depends on the dynamics at play at that specific fund but someone correct me if wrong because I'm also trying to think through this. Will my fund get caught by the toe? How can I think ahead five steps here so I'm not left trying to squeeze through a full doorway?

I imagine in context of newer LMM/MM funds, if you join a fund that raised fund II just before 2023 and hasn't sold fund I yet, they might have a fighting chance to make up for any shitty fund I performance if they take a beating on valuation. If you join a fund that is in the middle of raising fund II and hasn't sold fund I yet (taking a similar beating to the fund in my first example), and LPs shy away from committing, that sounds like a sinking ship. Worst I guess would be if you raised fund II and spent most of it before 2023 and now you're really in no man's land?

 

I cant help but think that in the next 2-3 years the # of juniors at these smaller funds will shrink dramatically, no?

I think the "tag-along" type of (L)MM PE funds that proliferate like crazy each bull market with no real distinct value proposition will get killed. However, being at a smaller, operationally intensive, nichey PE manager with true unique value distinction & industry/operations expertise is always a pretty safe bet, assuming your specific niche isn't getting crushed right now. But yeah, there are thousands of random XYZ Capital Partners firms that were able to raise easy money & deliver solid returns making high-level thematic bets without any specifically meaningful insights during the bull market, that literally just have zero selling point in a market like this. 

 

To add to this, a lot of "junior" senior people haven't properly been through a downturn. A lot of recent (say 5 year experience) MDs / partners who are in their early 40s were in their late 20s during GFC and were analysts / associates. They didn't really know what it was like to be a principal with money at risk during 08 and the subsequent years. For funds which are top heavy with these guys (i.e. funds which grew rapidly over last 10 years), LPs are concerned now about their ability to manage allocation and portfolio management going into what could be a few very tough years. 

Some of the MDs / partners in my fund got promoted because they closed a lot of deals in a short time in a bull market. Now that their investments are going poorly, it's clear who was just good at closing deals and who was good at managing them through to exit. Now that they're fundraising in a very different environment, they're struggling to build LP confidence that they can deliver returns vs. more seasoned funds.

 

Thought the new round was meant to close Q3 2023? Interested to see if they can actually hit target by then..

 

True, but also keep in mind they're trying to raise a 20bn dollar fund in this environment...at least they're already halfway

 

WCAS also tried to staple-tender its way across the finish line with no dice.

Wikipedia (lol) lists THL's latest flagship as $5.6bn in 2022, but it's pretty obviously 2021 from the actual news reports.

Advent hit their massive $25bner in 2022, but it was all Q1 (half-a-year process, done before June). The KKR flagship was H1 2022, but not that big of a jump from their last raise.

Haven't heard of Bain raising at all since their early 2021 fund, which is interesting / maybe circumspect lol.

Besides Permira, the other big success lately is Veritas (crossed $10bn in October).

 

Secondaries is one of the best asset classes to invest in so makes sense

Secondaries really is the future

 

At a UMM / MF. IR MDs saying it's the toughest fundraising environment they've seen in 20+ years, all of our funds bar the 2-3 flagships are really struggling vs. previous vintages. Fund has staffed up based on previous track record in fund growth, will be really interesting to see how it shakes out. Will be much tougher to move onto principal / MD in this environment. 

 
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I work at a large LP investing across primaries, secondaries and co-investments. Here's my (rather long) take on what's happening.

LP denominator effect is absolutely real and for the most part, GPs are to blame. In 2022, you had your public equities portfolio decline by ~20%, fixed income decline by 5% - 10% and lo and behold, PE retuns ~0%. I don't think GPs dissing on the denominator effect are really understanding what this is doing to a LP's portfolio. Your target allocation to PE just increased by 3% - 10% depending on the relative weights of these asset classes. The real question is how are PE values not going down when public comps are down 20%? The reasoning we hear - "our portfolio companies are doing well operationally and our multiples have always been lower than public markets". Erm, bullshit argument on the first piece (public companies also performed well operationally last year; the decline mainly had to do with multiples coming down from repeated interest rate increases) and may be ok on the second piece although how much lower PE mulitples are relative to public markets are very dependent on sector and a firm's valuation policies. The only way this logjam clears - either PE firms have to start seeing reality sooner rather than later and mark down their portfolios, or they have to pray that public markets have an absolute bull run in 2023.

But yes sure, in today's world, I am going to blame the denomninator effect rather than somehow try to spin "I don't think there's anything unique or differentiated about your strategy or return stream" when a GP asks for feedback after we decline their fund.

I feel for the guys who started their PE careers in the 2014 - 2017 timeframe. They would have finally received meaninful carry allocations but its going to be a heck of a lot harder than previous cohorts to actually realize that.

As a LP with capital to invest, I LOVE this environment! The balance of power had swung too far out in the GP's favour over the last decade. Today, no mgmt fee discount = we are out; no first close discount = we are out; anything other than 100% fee offset = we are out; any kind of pushback on key legal terms during negotiation = we are out. At least at my firm, we have already started tightening the screws in our favour every chance we get.

All that said, I really don't think this is the end of the world for PE. Most large LPs are still allocating capital; everyone understands the denominator effect, so no LP is in fire sale secondary processes. A lot of GPs have just gotten used to an environment where they can do mediocre investments at wrap speed, go back to LPs and raise a fund 2x the size. That has gone away (and hopefully for good). If there is a silver lining in all this, I hope that it helps both GPs and LPs slow down and focus on making great investments rather than just aggregating or deploying capital.

 

My view is that growth and VC are the two PE sub asset classes where the future is hardest to predict. On one hand, most (maybe all?) funds in these asset classes displayed literally zero valuation discipline over the last 5-7 years - I have seen growth equity portfolios where the average multiple paid was 17-18x ARR, and this is for companies that are cash flow negative. The only thesis for these companies has to be that you hope someone else will pay more than what you did when you look to sell. That's obviously not going to happen now. It remains to be seen how pissed off the LPs of these funds will be when they realize the true extent of damage.

On the other hand, tech valuations are significantly down today and if interest rate hikes continue, there is a possibility that valuations drop even further and then the next few vintages could be attractive investments for these asset classes. But as it stands today, anything to do with tech (growth, VC, even things like digital infrastructure - data centers, fiber etc) is where there's a lot of carnage and is hardest to raise money and do deals.

 

Really interesting breakdown and appreciate the high-quality post!

 

Thank you for the insightful post. 

Questions: 

  • Are LPs likely to prefer 'blue chip' funds at the larger end and sector / regional specialists at the smaller end? 
  • How important is sourcing / origination approach, and how may the importance or view on this change in the coming years?
  • Do you think it's a decent time for those who started their careers in 2020 / 2021 onwards, in terms of progressing and carry timing? 
 

1. LPs have been preferring blue chip funds for the last little while as they have attempted to consolidate GP relationships. I dont think that changes going forward. But at the same time, I don't think that the notion of being a blue-chip fund will help if the firm made shitty investments over the last market cycle. See examples on Carlyle, Apollo, TPG etc. where fundraising is taking way longer than expected. 

2. I know other LPs care a lot about sourcing / originiation channels and our primary investment team also spends a lot of time looking at this. My view might be a hot take - I usually don't give a hoot. Practically, I know that truly proprietary deals without a banker present are very very rare and no investment firm can (or should) consistently create enough deal flow if they are vehemently against banker led processes. All firms today seem to say that most of their deals are 'semi-prop' in nature which is a bit of a oxymoron. They are just pre-empting deals by building close relationships with the management teams and working faster than the rest of the players to put what is usually the highest price (or close to it) on the table. Nothing unique about this - everyone does it. But I have seen firms be able to generate consistently strong returns where the vast majority of deal flow comes from banker led processes. What do I care how if they always particiapte in processes if they are able to consistently realize strong returns? What do I care if all of their deal flow is propritary if their returns are usually 3rd or 4th quartile?

3. No, I don't. I think its going to be a tough slog. Firms will grow slower than in the past which means upward mobility will be slower than in the past which also means that the top brass is likely to hold on to carry points more closely than in the past. But you need to put this in perspective. I don't think there's any other career (except being an entrpreneur, a very different risk reward proposition) where you can consistently make as much money as you can in PE both in absolute terms and relative to the risk you are taking. I don't think that equation changes for people who are just starting out their careers.

 

Tpg secondaries - can't raise

Manulife secondaries - well well well below target.

 

Issue isn't secondaries, it's who are running those funds. Lousy investors.

 

Strongly agree... VCs were doing deals well north 40x NTM ARR at the peak in many cases. There was no valuation discipline. Size/illiquidity discounts did not exist -- if anything it was a premium. If EMCLOUD is trading at <10x ARR, and this is a new normal, the pain is going to be very real. Bear in mind that many of these private companies lack any sort of capital discipline.

Until founders take their medicine via structured rounds or downrounds/reset cap tables, we won't know the true extent. But my bet is private marks fall at least 50% from here over time.

 

Doesn't exactly count as a meaningful downgrade given the insane initial target, but H&F used to talk a big game about hitting $30bn (Q1 22) next fund and are now instead talking a big game about hitting $25bn (EOY 22). The latter is insanely high but technically only flat from last fund.

Also, you would think TB would suffer given tech and whatnot, but they did finally close their fund in December at $24b (up a bill from last), which is pretty impressive given sector and environment.

 

Doesn't exactly count as a meaningful downgrade given the insane initial target, but H&F used to talk a big game about hitting $30bn (Q1 22) next fund and are now instead talking a big game about hitting $25bn (EOY 22). The latter is insanely high but technically only flat from last fund.

Also, you would think TB would suffer given tech and whatnot, but they did finally close their fund in December at $24b (up a bill from last), which is pretty impressive given sector and environment.

I guess they (Thoma) managed to time it just about right to be at the closing line at Dec-22 rather than being in the middle of fundraising. 

 

Fundraising, as with most things, is mostly driven by timing, momentum and a lot of luck. Thoma and Francisco Partners would've never raised the funds they did without Vista blowing up. You have Orlando Bravo literally cracking the whip on the tech buyout pulpit while Robert Smith is dodging taxes left and right. Vista's fundraise is now halved to $10-12bn from the targeted $20-25bn. Guess where that missing half went? Straight to TB and FP and a smattering of other tech funds. 

Even all of these funds that have closed even in Q1 23 were riding the fundraising momentum of 2021-2022. Gemspring, STG, etc., all funds that have been oversubscribed got lucky as hell. Clearlake, Veritas, etc. same scenario--these were all strong performers that piled into the fundraising rush before things blew up. The next few years will be very interesting to see who actually holds up. Not only because interest rates as we all know were historically low and all these buyout players juiced up their returns but also because these funds are just massive now, playing in territory they're just not familiar with and in all likelihood not equipped to deal with. Forget 'proprietary' and 'off-the-run' sourcing. That's all bullshit. Every deal now is a full-blown auction. The #1 concern for any GP now is saturation of competition. There is a finite number of good deals (and companies) in this world but every year, every month, even every week, there are more and more competitors forming and spinning out to chase this small pool of potential investments.

And as for the commenter above who suggested that now is the time to invest in VC...just...lol. 

 

Why dont you think now is a good time to be invest in VC?