Private capital: Investment fund trends we expect to see in 2024

With 2023 drawing to a close, we look ahead at trends we expect to see in the private fundraising space in 2024.

Despite a stronger than expected economy, high rates continue to apply a downward pressure on private equity returns – driven by expensive borrowing and low valuations. 

According to data from Preqin, there was a 52% decline in funds that closed in Q2, compared with the same period last year. A 38% decline in Q3 compared to the previous comparable period, however, indicates there are signs of improvement. Moving forward, GPs will continue to be hopeful that improving investor sentiment can increase their fund closings in 2024.

Increased regulatory costs (particularly in light of new SEC private fund reforms) and a continuing oversupply of managers chasing capital in the market, coupled with the economic outlook, led to increasing consolidation in private equity this year. Smaller, monoline managers remain under pressure. This trend is expected to continue in 2024, as managers continue to face difficulties in navigating a difficult fundraising environment with sluggish investor sentiment. 

The growing shift towards high-net-worth individuals and quasi-retail investors as a capital base observed through 2023 is also expected to continue and indeed increase in 2024. Such capital proposes regulatory and practical complexities, which GPs will continue to aim to overcome by utilising access funds and feeder structures established by third-party intermediaries, and through the increased use of LTAF and LTIF structures in the UK and Europe. There is significant scope for growth in this area, with some reports indicating that around 50% of the roughly $275 to $295 trillion assets under management are held by individual investors.

Whilst management fee, carry and preferred return rates have remained relatively stable, managers are adopting various methods to secure capital. The extension of fundraising periods beyond 12 (and in some cases 24) months and rolling closes should continue to be a feature in fundraisings in 2024.  Priority co-investment incentives and fee discounts for large-ticket and first-close investors will also return to the foreground, along with top-up products and similar being used to close out fundraises towards the end of their fundraising periods.

The boom in private credit is expected to continue in a similar vein in 2024, as borrowers are spurred to seek alternative lending sources by higher rates and volatile public markets. According to Preqin, the private credit market is expected to grow from $1.6 trillion this year to $2.8 trillion. This should, however, be seen against a backdrop of investor questions around NAV facilities and other products increasingly used and raised throughout the industry.

As it relates to secondaries, 2023 has been a year of deal diversity. Following the trend of the second half of 2022, the LP-led market gained strength in 2023, as pricing for high-quality buyout portfolios increased since Q1 2023.  Demand for these types of transactions was supported by recent fundraises and the ability for selling LPs to bring mosaic portfolios to market.  Secondaries investors sought increased exposure to specific GPs and strategies (such as buyout, private credit and infrastructure), and even to specific vintages of funds. 

On the other hand, there was reduced demand for GP-led secondaries generally, as investors focused on higher-quality GP-led transactions, despite improvements during the last quarter of the year (as evidenced by transactions increasing $1 billion in deal size).  GP-led transactions which attracted buyers centered around “trophy assets” in profitable industries with strong projected returns.  While single-asset transactions remained strong, investors have moved towards multi-asset deals.  

With the GP-led market still being perceived as crowded, GPs were faced with buyers with higher demands in terms of underwriting standards and legal terms.  GPs who managed to differentiate themselves via meaningful alignment with LPs by offering a significant GP commitment or an investment from the new flagship fund managed to complete deals at a faster pace.  

Interestingly, 2023 also saw a growth in preferred deals and other structured secondaries globally, and especially in Europe.  These transactions have gained popularity as they offer investors bespoke secondaries strategies in specific industries and offer flexible legal arrangements.

From a regulatory perspective, 2024 looks to see various trends from 2023 continue. As well as increased regulatory focus on marketing to non-professional investors (linked to  the trends mentioned above), areas where private fund managers should focus their attention include ESG (next year will see the implementation of the FCA’s new Sustainability Disclosure Requirements) and the SFDR will continue to evolve, culture and individual accountability, financial crime and sanctions and the UK’s divergence from EU rules (which may bring some benefits to UK managers  and advisers). 

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