Smaller private equity managers faced a tough fundraising environment last year as investors gravitated to larger, well-known firms perceived to be safe bets amid market volatility.
The total amount raised by private equity funds larger than $5 billion reached an all-time high of $445 billion in 2022, up 51 percent from the total amount raised by funds of similar size in 2021, according to the latest private markets report from McKinsey. Funds with less than $5 billion in assets raised 28 percent less capital than they did the year before.
The fundraising environment was even more difficult for the smallest group of funds, which are defined by McKinsey as those with less than $250 million in assets. According to the report, only 1,500 of these funds reached their fundraising targets in 2022, down 51 percent from the year before. That’s the lowest level since 2015.
First-time managers also had a challenging year, raising a total of $32.1 billion in 2022, down from $42.8 billion in 2021 and the all-time high of $93.2 billion in 2017. These managers made up only 5 percent of total fundraising last year, the lowest percentage in the last 20 years, according to the report.
“Amid a pullback in commitments, an outsized share of capital flowed to the largest funds, as investors re-upped with their existing managers but reduced backing [for] smaller and new funds,” the report said.
Globally, PE fundraising declined to $655 billion in 2022, down 15 percent from the year before. The value of deals fell just 5 percent in the first half of 2022, compared to the same period in 2021. But the report indicated that it dropped 45 percent year-over-year in the second half of last year.
In the fourth quarter, the value of all deals was $418 billion, making it the second-least active quarter since 2017. The lowest, $259 billion in deals, came in the second quarter of 2020 during the early days of the pandemic. Despite the lackluster environment in the second half, 2022 was the second most active year, with $2.4 trillion in deal value, down 26 percent from the peak in 2021.
According to the report, a number of factors contributed to the sluggish environment in the second half of 2022, including consecutive rate hikes, slumping public markets, and a tighter lending environment. Faced with these challenges, investors sought refuge in well-known private equity brands and pulled back from the newer funds, which were perceived to carry higher risks.
“Increased concentration among larger funds may reflect a move [by investors] to limit risk in a volatile equity market,” the report said. That’s because larger funds deliver very similar returns. The range is much wider for their smaller peers. “Typically, the median performance of larger funds is similar to that of smaller funds, but the dispersion of returns is narrower for larger funds.”
