2 minute read
Campbell Lutyens
ANDREW BENTLEY
PARTNER, CAMPBELL LUTYENS
2022 looks like it will be a very congested year for private equity funds, with potentially twice as much capital being sought from LPs than the busiest year we’ve ever seen.
Plenty of GPs will get funded very fast, but many GPs will have a more drawn-out process as LPs figure out what allocations they will get into rival GPs funds before deciding what is left for the rest. This is despite most GPs having had very good performance in the last 12 months.
The crush in 2022 will inevitably spill over into 2023 because the industry won’t be able to raise the EUR 300 billion that the GPs are asking for during one single year. It’s not possible.
We’ve already seen a bifurcation of outcomes in fundraises: some get done very quickly, by which I mean, within four to six months; and others take 12 to 18, or even 24 months.
For a few years now, the bigger, established funds have been coming back with larger funds quicker. It creates congestion and a lot of pressure. And that pressure gets dissipated in different ways.
We’ve also got private wealth making inroads into the sector. In general, private wealth feeders focus mostly on the biggest brand name GPs and don’t seek the middle market firms. All these trends support the bigger firms. So where are we going to be at the end of 2022 if that continues? The middle market and the independents and sector specialists are going to need to generate even stronger returns to be able to compete.
The big GPs have been building their sales teams and proliferating their product offerings trying to dominate the LP capital available. It’s an unbelievable power play out there, with these groups trying to get as much LP allocation as possible by addressing every single part of an LP’s private fund requirement.
High deployment rates suggests that dry powder is not a problem. The speed of deployment is a symptom of the fundamental shift in the upper reaches of the industry from focusing on carried interest from investments to seeking to maximise the value of the shares in the GP itself. Deployment drives fund growth which drives share prices and shareholder value. GPs are of course concerned about entry values, but there’s not fundamentally much most of them can do because they have to keep deploying, and we are in the market that we’re in.
Specialism is how the middle market in particular is trying to manage this: focusing on sectors and themes where they have a clear edge. That edge is necessary and a very real reason why they and not the other 15 to 20 people bidding for an asset will secure it. So generalist private equity is out and having a specialist focus is in. In 2021, specialisms in technology and healthcare were very sought after and in 2022 we expect specialisms in sustainability and energy transition to be very sought after.
