FUNDRAISING CHAPTER “GROWTH FUNDS ARE BECOMING THE ‘MUST HAVE’ PRODUCT EXTENSION FOR VENTURE CAPITAL FUNDS”
THOMAS MCCOMB
PRIVATE EQUITY PORTFOLIO MANAGER, JP MORGAN ASSET MANAGEMENT
W
e expect to see robust activity in the private equity fundraising market in 2022, similar to what we have seen over the past several years. There are two main factors driving this. Firstly, returns continue to be strong. Buyout returns have been compelling, especially in growth segments such as technology in recent years. Additionally, after a difficult decade in the 2000s, returns in venture capital (VC) and growth funds among the best firms have done an exceptional job of securing more capital to each of the sectors and attracting new entrants. Returns on well-implemented private equity portfolios have produced a substantial premium on the public equity benchmarks. Secondly, distributions have been quite strong, both from buyout and VC and growth funds – we have seen a robust exit market. Trade and financial buyers have both been quite active. We have also continued to see a robust IPO market, with some firms using SPACs as another avenue to a public exit. We would expect the years following 2022 to continue to be favourable for private equity funds raising, assuming the current conditions with regards to returns and distributions persist.
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Established investment firms continue to use their franchises to generate product extensions. While this has been common among the ‘mega-funds’ for a number of years, we are starting to see funds in the small and mid-markets pursue such strategies. We are seeing larger and mid-market firms raise small cap funds, co-investment funds and credit funds. Growth funds are becoming the ‘must have’ product extension for VC funds, with others considering additional verticals and geographies. In 2022, firms with strong established track records, with differentiated strategies, should continue to perform well. Technology is playing a role in a few ways here. Firstly, the rise of virtual meetings particularly by VC firms, which were being implemented before the pandemic, have accelerated. While we do not expect in-person meetings to be eliminated, many initial due diligence meetings and some follow up ones are now conducted virtually. These enable GPs to spend more time in their office raising capital in place of extended road shows. Secondly, technology also enables much more sophisticated use of data which helps GPs better articulate their story, and LPs to better evaluate them.
Finally, technology as an investment sector, is obviously a core area for focus for VC and growth firms. It continues to grow in importance for many buyout firms. In terms of new talent, a number of investors, particularly newer ones to private equity, have established emerging manager progammes where they invest in funds raised by firms they expect to be the established firms of the future. Newer groups will likely face competition from industry incumbents in two ways: the aforementioned product extensions by established firms; and an increased velocity of capital investment. Many firms are seeing a more rapid investment pace in this cycle which is necessitating a return to raise new funds more quickly than originally anticipated. In some cases, three to five year investment periods have shrunk to one and a half to three years. In addition to having strong investment track records, new private equity firms will need to differentiate themselves through their strategies to overcome such challenges. Co-investments remain in high demand as do stapled secondaries. Investors want the ability to invest capital with more visibility, lower overall fees, and reduce blind pool risk.
PRIVATE EQUITY GLOBAL OUTLOOK REPORT I JANUARY 2022
