Industry Insights: Fundraising focus
Martin Senk, BVCA Research Manager, takes a closer look at the data from the BVCA’s Investment Activity Survey, bringing the fundraising data into focus and looking forward to 2023.
Number of funds hold steady, drop in amount raised
More than 100 funds raised capital in 2021 — a figure similar to recent years. However, when taking a closer look at the different fund investment stages, we see that the total fundraising amount dropped dramatically. This is due to a significantly smaller amount raised by buyout funds compared to 2019 and 2020. Such change of pace points to a temporary market saturation across UK-managed funds with many investment managers focusing primarily on capital deployment in 2021, which reached £17.3bn in the UK alone — nearly twice as much as in 2020.
Overseas investors holding back
We know that PE and VC generate strong returns for their investors. But where are these investors located?
A significant proportion of capital comes from overseas and the UK-based funds attract investment from around the world. North American and Asia Pacific LPs are the key source of capital for global buyout firms and we saw a sharp dip in their 2021 commitments as illustrated below. For those fundraising for earlier stage strategies, venture funds had a rather fruitful year raising almost £3bn, primarily from UK and European LPs.
Concentration of capital
It comes as no surprise to see a year-on-year decrease in the number of ‘mega-sized’ funds raised (>£1bn) given the drop in cumulative fundraising (£7.5bn vs £33.5bn) in this size bracket. Mega funds raised around 45% of total capital in 2021 (vs.. 76% in 2020), pointing to a more even dispersion of capital commitments across fund sizes.
2022: Economic challenges & market change
The world in 2022 looks very different to 2021. Private equity firms are under pressure to navigate new sets of challenges in the post-pandemic landscape, both in terms of investments and fundraising.
With the shift of capital concentration towards more established fund managers, smaller GPs are jostling for LP commitments amid rising inflation and higher market uncertainty(1). Many institutional LPs focused on evaluating requests for additional capital commitments from firms they knew during the pandemic and we anticipate this trend to continue(2). Emerging managers are especially likely to face difficulties when fundraising in this challenging market as they are more likely to lack an existing LP network.
As a result, some GPs have come to rely on placement agents, while others have decided to attract investors by raising niche funds and forming strategic alliances with industrial partners who can give them access to assets that would otherwise fall under the radar.
Outlook for 2023
Economic conditions are likely to remain challenging as we head into 2023 with private equity and venture capital firms providing businesses with long-term capital aligned with industry expertise to support them through turbulent times. While a certain decline in company valuations is to be expected in the short term, the industry continues to be supported by high levels of dry powder(3) and has proven to be resilient in economic downturns. We are likely to see investors boost their private credit allocation in order to capitalise on higher available yields and secure stronger protection against risk(4). ESG factors will continue to be integrated into the investment decision-making process of fund managers throughout 2023 and beyond.
What does this mean for fundraising?
Firstly, funds that do not need to raise capital may pause to see how the land lies with teams staying focused on supporting existing portfolio companies.
However, for funds that are coming to market, the fundraising process is expected to take longer than in recent years due to the more stringent due diligence requirements of LPs. GPs will need to demonstrate unique capabilities to be differentiated from others in the market, but there will always be capital available for the right investment teams.
Research Manager, BVCA
Note: Funds managed by UK private equity and venture capital firms and those managed by UK-based offices of international private equity and venture capital firms are included in BVCA statistics.