Finding the Silver Linings

Public market corrections, inflation, increasing interest rates and political uncertainty are all having an impact on LPs’ capacity to invest in private equity. This is already leading to a knock-on effect on private equity fundraising, but what might this mean for the industry over the short to medium term? And where are the bright spots for investors in today’s environment and beyond? Markus Benzler, head of multi-managers private equity at UBS Asset Management, gives his take on how the market will evolve.

Fundraising for single primary funds is very difficult currently – and that’s true even for larger, branded funds. The denominator effect is really coming into play here as LPs that might previously have written, say, USD 200 million tickets are now looking at USD 30-50 million cheque sizes. In some cases, we are seeing commitments shrink by up to 90 percent from predecessor funds where LPs want to continue their relationships with larger funds. Elsewhere, smaller ticket sizes are often resulting in deployable capital flowing to smaller funds.

This will clearly have an impact on the market – we will see fewer funds able to raise and it is quite possible the industry will shrink from a deployable capital point of view. With less debt available on the market, we may well see more co-investment opportunities, better priced secondaries and better deployment capacity with primary funds – and that will be a positive development for investors like us.

That said, the fund of funds, or multi-funds, fundraising market seems to be holding up relatively well. In the past 10-15 years, funds of funds have lagged behind the general private equity industry growth. However, there is less competition than in the single fund market, and multi-fund managers have become very active in co-investments and secondaries in recent years, which has helped boost returns and differentiate their approach.