Brighton House Releases 2022 EOY Fundraising Report

Brighton House 2022 EOY Fundraising Report  

A Market Re-Set/Popular Strategies/ Family Offices Flex Their Muscle

Given the unprecedented amounts of capital which flowed into global markets during the Covid years of 2020 and 2021, the private markets seized the opportunity to drive/buy growth, resulting in very active and profitable investment period. During that time, it appeared that valuation was the ultimate guidepost for success as the public and M&A markets thrived. 2022 brought about a significant reversal as the threat of a looming recession and rising inflation caused a drawdown in public markets, stalled IPOs, M&A, and new investment activity, which directly impacted LPs ability to commit capital.

 A large portion of the private markets industry, regardless of GP size, fund vintage, or strategy experienced fundraising delays in 2022. LPs were forced to manage constrained budgets, exacerbated by the denominator effect tied to public markets, economic uncertainty, and GP’s shortened fundraising cycles. Reduced LP liquidity required GPs to extend fundraises and source new LPs to fill gaps.

 Over the second half of 2022, Brighton House Associates spoke with over 1,500 institutional and family office LPs in North and South America, Europe, Asia, and the Middle East and we have compiled these discussions in our 2022 End of Year Fundraising Report. The data below is structured to highlight the overriding themes we heard from LPs to provide guidance as GPs look to raise capital in 2023.

 A Resetting of The Market

By the end of Q1 2022, over 25% of the LPs we spoke to stated their 2022 budget was fully committed and by the end of Q2, that number had risen to nearly 75%. Many LPs struggled to keep up with the increased flow of re-ups and reduced liquidity in addition to the falling public markets.

Some LPs did see the correction as an overall positive though, bringing the industry back to a reliance on business fundamentals and metrics as the guidepost for success. A Family Office on the US West Coast commented that they expect 2023 to bring pricing back to a more rational level. An Endowment on the US East Coast anticipated their private markets valuations to revise downwards at year-end, helping to rebalance their private markets portfolio skewed by the denominator effect. Overall, a healthy return to a focus on fundamentals and entry valuations was a positive result of 2022 and many LPs shared this view.  

Some LPs Increased Private Markets Allocations

While some investors were concerned about the performance of private markets in a possible recession, one London-based Family Office commented that their best performing investments were made following recessionary periods. Following the dot-com bubble and the global financial crisis private markets returns consistently outperformed the public markets and this LP was looking to take advantage of investment opportunities derived from current economic pressures.

Some LPs looked to increase their allocations to private markets heading into the New Year. Near the end of 2022, CalPERS appointed a new leader of its private market investment program with the goal of growing its private equity assets from 8% to 13% of its overall portfolio. In September, the investment board of the Iowa Public Employees' Retirement System increased the pension's PE allocation from 13% to 17%. A Family Office in Australia told BHA in December that it has only at 50% of its private markets goal and was expecting to commit another $150m in 2023.

Popular Strategies

LPs reported that they remain on the lookout for strategies that would benefit from a reset in market pricing, were defensive in nature, or could take advantage of dislocations created in the current environment.

The Lower Middle-Market

Many GPs significantly increased fund sizes in 2022 and we heard from numerous LPs that there was concern about sizing out of the GP’s core investment expertise. Several LPs commented that they wanted to source private equity GPs with differentiated expertise in exploiting the inefficiencies of the lower middle-market. One Family Office in New York commented that their minimum buyout MOIC hurdle would be difficult to achieve once funds scaled into larger markets. The family office is now pursuing GPs investing in businesses with sub-$50m in Ebitda. One Nordic pension commented to BHA this month that they have traditionally invested in larger funds and now were mapping the lower middle-market as a source of alpha. 

Buyout in general has been a refocus for many LPs who are now overweight venture due to the market run-up in 2021. Numerous LPs have commented that they are building out their 2023 pipeline with a renewed focus on buyout managers given the current view that valuations have come back to more rational levels. Both generalist and sector specialist have been areas of interest and due to the current economic environment, we have seen some LPs look to GPs with an exposure to sectors with less beta to the overall market.

We expect GPs raising sub-$2bn buyout funds in 2023 to find sustained interest among LPs.

Secondaries

Not surprisingly, LPs looked to explore the secondaries market, both as sellers and buyers, in 2022. The demand for liquidity is expected to push to record levels of deal flow and 2023 could be an historic year. Secondary transactions reached new highs in 2022, hitting $57 billion in total volume in the first half of 2022, according to Jefferies' global secondary market review. This trend continued in the second half of 2022 as the denominator effect exacerbated LPs liquidity crunch in addition to the drastic drop last year in exits. US PE investors achieved $293 billion in exits through the end of Q3, 2022, a significant drop from 2021's $863 billion. BHA spoke to several LPs in the US and Europe who were excited about the buying opportunities in the secondary market and were actively looking to commit capital to new funds in the sector.  

Infrastructure/Real Assets/ESG

Given the rising threat of inflation and stagnant economic growth, private real assets strategies have tailwinds heading into 2023. BHA saw a marked increase in interest from global LPs to source strategies which provide both uncorrelation and ESG impact in the second half of 2022 as LPs seek stable returns and an inflation hedge. Regarding ESG, many LPs have also become increasingly aware of the significant spending needed to reduce carbon emissions and that governments won't be able to afford to build critical infrastructure with constrained budgets post-COVID-19-stimulus.

The Rise of The Family Offices and RIA’s

Two types of LPs have stuck out in terms of available liquidity and interest. The last five years produced significant wealth and many families experienced substantial liquidity events. BHA observed many new family offices being set up in the last 24 months and large RIAs and Wealth Advisors moving towards offering private markets funds to a growing base of wealthy clients. This month BHA spoke to a large multi-family office in Boston which just kicked of the raise amongst their clients for a co-mingled fund to invest in diversified private markets funds. Another family office in Denver recent commented to BHA that their founder experienced a ten-figure liquidity event in 2021 and was planning on committing over $500m to private markets funds in the next 12 months. Unlike some of their institutional LPs, family offices and RIA’s, who may be newer to investing in the private markets, have reduced liquidity constraints due to a less mature portfolio and we expect family offices and RIAs to be very active in 2023.

Looking Ahead

A reversion to the mean was necessary in 2022 and while some investors are in a wait and see mode, as 2022 portfolio reviews are completed, we believe 2023 will be a more robust fundraising market. Many LPs have commented this month that they have less portfolio GPs coming back to market which will free up additional liquidity. One endowment BHA spoke to commented they expect fundraising to revert to a typical 3-year cycle as opposed to the 18-month cycle recently experienced. For some this will mean investing in new GP partners to rebalance portfolio allocations and access attractive strategies.