Private funds – June 2024 Market Update

Preqin reported that global private equity fundraising fell 11.5% year over year by aggregate value in 2023, the lowest total since 2017 and the 1,936 funds closed during the year was the smallest annual number since 2015.

Due to financing constraints and the valuation gap between buyer and seller expectations, the pace of exits has continued to be slow and fund raising has therefore continued to be sluggish in 2024, as limited partners (LPs) have received fewer exit distributions with which to fund new commitments (larger pension fund LPs may also have overallocated to private equity (PE) in recent years, further constraining fundraising efforts). The average fundraising “time on the road”, i.e. the period between launch of a fund (usually understood as the date of the issue of its private placement memorandum) to its final close is now around 19 months, which is historically high (many funds used to cap the fundraising period at 18 months). However, at the recent SuperReturns conference in Berlin there was a sense of cautious optimism that the downward trend of interest rates would reduce financing costs and therefore lead to an uptick in exits this year (dry powder has also reached another historical high putting general partners (GPs) under increased pressure to deploy capital). Distributions of exit proceeds to LPs provide liquidity for LPs to make re-up commitments with existing GP relationships and to a lesser extent commitments to new GP relationships. The lack of exit distributions in recent years has meant that the relative winners of the tight fundraising and credit environments have continued to be the large blue-chip PE brands and private credit funds. Due to their networks and technical and back-office infrastructure, these large PE brands have also been best placed to exploit the growing opportunities to tap the quasi-retail market via their own tech-enabled platforms or third-party platforms, such as Moonfare and Titanbay.

GP led secondary transactions and continuation funds, where LPs are offered the opportunity to roll their existing commitment to a fund into a continuation fund or cash out in favour of new investors, have continued to be popular as a liquidity mechanism for LPs, in the absence of exits.

At a local UK level, the upcoming general election has focussed the industry’s attention on Labour’s mooted plans to increase the tax rate applicable to carried interest received by executives and the proposed update to the UK’s “non-dom” regime, leading to fears that such reforms will make the UK less competitive as a fund management domicile as compared to key EU competitors, including France, Germany and Italy. For example, UK based executive with a carried interest entitlement, has to wait 7 to 10 years to receive carried interest, which would then potentially be taxed at 45% in the UK (i.e. the highest interest rate bracket); this contrasts with France, Italy or Germany where carried interest is taxed at between 26 per cent and 34 percent.

And so, while there are good reasons to believe that the general fundraising environment will improve this year, it will be interesting to see (that Labour wins the election) the final form of the revised carried interest taxation rules and whether they reduce the attraction of the UK as a venue for fund management.