Private equity firms brace for slower fundraising

Private equity firms are anticipating a tougher fundraising slog as market volatility hits both their own balance sheets and those of their institutional investors.

In recent earnings calls, some of the largest private equity firms remained bullish about deal-making opportunities in the current environment even as market upheaval and rising rates drove down the value of their holdings.

Publicly traded fund managers posted significant hits to their bottom lines in the most recent three-month period, and at least four of the largest firms — Apollo, Blackstone, KKR, and TPG — booked losses for the June quarter. For Apollo, it was the second consecutive quarterly loss.

However, the value of the private equity firms’ investments declined by far less than the more than 16% decline over that period for the S&P 500 stock index, which also reported its worst first-half performance in more than five decades. And firm executives said that, by and large, portfolio companies’ operational performance remains strong.

Still, the battered stock values created imbalances for institutional investors’ portfolios, in what’s known as the denominator effect, which many fear will hinder the flow of new capital to illiquid assets such as private equity.

Caspar Callerström, deputy chief executive of European buyout giant EQT, for one, acknowledged in the firm’s most recent earnings call that some clients, particularly in the US, had already reached their private equity target allocation.

“As a result, new fund initiatives will take longer to raise in this market, and we expect existing clients to represent a large share of our ongoing fundraises,” he said.

Callerström said the firm had raised about two-thirds toward its 10th buyout fund, which targets at least €20bn, with a final close expected in 2023.

TPG chief executive Jon Winkelried said the private equity firm accelerated the timing of first closes on its large flagship fund, closing on a combined $10.6bn for its ninth flagship private equity fund and its second healthcare focused fund, and on $1.6bn for its third impact investment fund. The firm targets a combined $18.5bn for the first two and $3bn for the impact investment fund, Winkelried said during an earnings call.

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“On balance, similar to peers, TPG acknowledged ongoing extensions in fundraising timelines that have been prevalent across the industry in recent quarters,” JPMorgan analysts Kenneth B. Worthington and Michael Cho wrote in a note about the firm’s second-quarter performance.

Meanwhile, GCM Grosvenor chief Michael Sacks warned that its latest private equity secondaries fund, which is already about 30% larger than its predecessor, may miss its original goal because of the timing of fundraising.

He expects the alternative assets manager to wrap up fundraising efforts for the offering in late 2022. Other specialised funds, he said, will continue to raise capital into 2023 and remain on track. GCM, he said, stepped up fundraising in the second quarter, adding about $2.1bn in new capital.

Apollo raised $36bn in the quarter, ahead of expectations, and raised about $13bn more in the current quarter for its 10th flagship fund, BMO Capital Markets analysts Rufus Hone and James Fotheringham said, adding that the firm is on track to exceed its fundraising target of at least $80bn across strategies this year.

Although some institutional investors face allocation limits and pressure from the denominator effect, StepStone Group chief Scott Hart said that some of the investment and advisory firm’s other clients are starting to build a private markets portfolio, increasing allocation or accelerating the pace of deployment.

“For every conversation we’re having about the denominator effect, we seem to be having another one about launching a new private-markets program or accelerating deployment into a private markets program,” he said in a conference call with analysts to discuss the firm’s June quarter performance. “And that certainly gives us some level of confidence.”

Chris Smyth, EY Americas private equity leader, pointed to the firms’ performance records through prior economic ups-and-downs and the more than $1tn in so-called dry powder, or money raised but not yet invested, as reasons for optimism.

“One of the things PE has shown is that they are resilient,” Smyth said. “They bring this focus and speed to action to make sure that they continue to drive differential returns.”

—Ted Bunker, Chris Cumming and Luis Garcia contributed to this story.

Write to Maria Armental at

This article was published by Dow Jones Newswires, a fellow Dow Jones Group service

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