Best of LinkedIn: Private Equity: Fundraising CW 33/ 34

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00:00:06: Fundraising insights in calendar weeks thirty-three and thirty four.

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00:00:18: description.

00:00:20: yeah.

00:00:20: so right now there is over a trillion dollars of private equity capital just sitting completely idle.

00:00:28: Honestly, the traditional ten-year fund model.

00:00:30: it might just be breaking right in front of us.

00:00:32: Yeah I mean we're doing a deep dive today to cut through The noise of this current fundraising cycle.

00:00:37: We're looking at the top insights across the market Just to see where the smart money is actually moving

00:00:42: Right and how the underlying mechanics of all these deals are shifting In real time because the baseline tension driving everything right now.

00:00:48: Is this massive fundamental mismatch?

00:00:50: Mm-hmm deployment clocks for GPs And exit clocks For their portfolio companies Are well they're completely out of sync

00:00:56: Completely yeah, and it's creating this massive liquidity bottleneck that's forcing everyone you know from the big pension funds to the GPs themselves to rethink their capital structures.

00:01:07: Yeah, put some numbers into that bottleneck.

00:01:09: Deakshunt Bakshi shared recent data.

00:01:11: The headline is that one point zero seven trillion dollars in uninvested US PE Capital Is just sitting there

00:01:18: A trillion dollars?

00:01:20: That's insane!

00:01:20: It is

00:01:21: But honestly the more dangerous side.

00:01:23: what happening with holding periods for the capital already deployed?

00:01:28: So the median holding time of existing positions has stretched to four-point two years and to successfully exit last quarter, they were holding those assets for an average of six point four years.

00:01:39: Wow!

00:01:39: Six-point-four years?

00:01:40: I mean that delay just fundamentally breaks the distribution model for LPs because when capital stays locked up for nearly seven years before an exit... The IRR starts decaying rapidly even if your multiple uninvested capital is stable.

00:01:53: Greg had framed this perfectly.

00:01:54: actually he pointed out time is essentially the denominator killing private equity.

00:01:59: right now GPs are sitting on unspent dry powder.

00:02:03: They have a ticking deployment clock, but they're under immense pressure to show actual cash distributions

00:02:09: right because LPs Are not gonna commit a single dollar to the next vintage until they see some cash exactly.

00:02:15: and look those LPs are Not just passively waiting around either.

00:02:19: Jason licey highlighted how aggressive of the reaction from major allocators has gotten.

00:02:24: like Ivy League endowments and huge state pensions are just dumping stakes on the secondary market.

00:02:29: Yes,

00:02:30: offloading

00:02:30: them Yeah at an unprecedented scale.

00:02:32: I mean The University of California sold a billion dollars Of its PE book.

00:02:37: Wow Harvard offloaded roughly a billion.

00:02:39: Yale sold two-and-a-half billion And Calpers dumped six billion dollars.

00:02:44: That's huge.

00:02:46: You know when you look at the mechanics of why a CIO and a pension fund would actually accept their haircuts on a secondary sale It all comes down to the liability match.

00:02:55: because they had these strict predictable payout obligations Back when risk free rates were it zero.

00:03:01: They needed private market yield to meet those obligations.

00:03:04: Yeah, I've accepted.

00:03:05: The illiquidity is just the cost of doing business

00:03:07: right?

00:03:07: But now, with risk-free rates hovering around what?

00:03:10: Five percent.

00:03:11: The math completely flips the illiquidity premium.

00:03:14: you know that extra return PE has to deliver To justify a ten year lockup.

00:03:20: it's shrinking rapidly.

00:03:21: Oh

00:03:21: absolutely

00:03:22: I mean getting a theoretical eight percent preferred return on highly illiquid ten-year lockup looks pretty terrible when you can just grab five percent with daily liquidity and treasuries.

00:03:32: Yeah,

00:03:32: that shifting map is forcing these traditionally patient LPs to become distressed sellers because traditional M&A in IPO markets have been well functionally closed or severely delayed.

00:03:43: so GPs are realizing they have to manufacture cash themselves to send back to these yield starved LPs And the way their bridging that gap through this exploding secondary and hybrid liquidity market.

00:03:54: Yeah, Leila Kunimoto pointed out a dynamic that just perfectly illustrates how complex this liquidity manufacturing has become.

00:04:02: So Aries is currently bundling three billion euros of LP stakes from its own eight-year old European Direct Lending Fund for secondary sale because the underlying borrowers in that fund aren't refinancing and the sponsors backing them are selling.

00:04:18: so the capital is structurally trapped.

00:04:20: But at the exact same time, Aries just raised seven point one billion dollars for its own credit secondary strategy.

00:04:27: That

00:04:27: is wild!

00:04:28: Think about the mechanics there.

00:04:29: They're acting as one of the largest sellers of LP stakes in the market to generate liquidity, while simultaneously raising a massive new vehicle.

00:04:36: To act as one Of those exact same types of states crazy.

00:04:41: Yeah this is no longer some niche opportunistic strategy.

00:04:44: Peter Orzag at Lazard shared macroeconomic data showing that secondary market volume hit a hundred and twenty four billion dollars In just first half The year right?

00:04:53: And the trailing twelve month volume Is sitting At A record two hundred and sixty Billion.

00:04:57: the scale is staggering But you know, it's the financial engineering happening down at the individual asset level that really demands scrutiny.

00:05:05: Oh absolutely!

00:05:06: Cedric Tase here highlighted something from White & Case noting that sponsors are running out of easy exits.

00:05:12: so to force these distributions they're stacking liquidity tools.

00:05:16: we're seeing GPs execute minority stake sales then followed by GP led secondaries and then their layering NAV loans on the exact same underlying assets.

00:05:26: yeah And real quick, before we dig into the structural risks of that exact capital stack.

00:05:31: If you want to keep catching this level of market intelligence as the cycle evolves make sure you just hit subscribe to this deep dive so don't miss future editions.

00:05:39: good call but yeah let's look closer at that engineering because stacking NAV loan a minority equity sale and a GP led secondary on the same underlying company doesn't seem incredibly fragile

00:05:52: highly fragile.

00:05:53: Aren't they just trading a short-term liquidity crisis for a massive solvency crisis later?

00:05:57: I mean, you're essentially building a Jenga Tower of leverage.

00:05:59: The Jenga tower is exactly right and that's the structural risk nobody really wants to price in right now.

00:06:04: Yeah When you manage a highly illiquid private portfolio For immediate liquidity like your treating it Like public market cash flow vehicle You introduce exponentially more fiction.

00:06:16: A stacked liquidity structure means you have three completely different sets of growth and valuation assumptions that all have to hold perfectly at the exact same time.

00:06:25: Because if the underlying EBITDA growth stalls even a bit or the market forces multiple compression across the sector, the whole math falls apart?

00:06:33: Completely!

00:06:34: The cross-collateralization in an NAV loan suddenly threatens the entire capital structure underwriting that specific stack based on historical you know low rate relationships.

00:06:45: it simply doesn't scale.

00:06:46: And

00:06:48: that changing risk profile, this fear of these fragile Jenga towers in the middle market.

00:06:53: That's exactly why we're seeing such a bizarre paradox and fundraising right now.

00:06:57: Oh yeah Overall fund raising is down but specific mega funds Are just vacuuming up virtually all the available capital.

00:07:05: LPs are fleeing to perceived safety.

00:07:07: Yeah,

00:07:07: The concentration is extreme.

00:07:09: Calvin crutes broke down the numbers.

00:07:11: for the first half of the year the top ten buyout funds alone raised a staggering one hundred and twenty nine point.

00:07:17: three billion dollars combined.

00:07:19: unbelievable

00:07:20: right.

00:07:21: that single list includes KKR closing its North America fund at Twenty-three billion which makes it the largest north america focused by outfund in history.

00:07:31: Wow.

00:07:31: And it's not just generalist funds, the specialized tech players are dominating too.

00:07:35: HG which is an absolute giant with eighty four percent of its managed enterprise value locked in TMT.

00:07:41: they contributed two flagship vehicles to that exact same top ten list.

00:07:45: That's wild, but you really have to contrast that mega fund dominance with the broader market reality.

00:07:50: Alexander Lubichov shared McKinsey latest report and it paints a very different picture for everyone else.

00:07:55: global closed NPE fundraising actually fell seventeen percent to roughly six hundred sixteen billion dollars.

00:08:01: But missed that decline funds sized above five billion captured thirty-five percent of all that capital up from twenty eight percent back in twenty twenty

00:08:08: one.

00:08:08: That's a huge shift.

00:08:09: It is, and as this capital concentrates at the very top it creates a self-fulfilling pricing dynamic.

00:08:15: Median entry multiples have climbed to a record eleven point.

00:08:19: eight X EBITDA

00:08:20: Yeah!

00:08:20: And that multiple expansion is just the direct result of the fund sizing.

00:08:24: I mean when you deploy A twenty or twenty five billion dollar vehicle You are structurally forced to compete in highly efficient fully priced mega auctions.

00:08:35: Right because two hundred fifty million equity check into a middle market company with real operational upside, that just doesn't move the needle for fun.

00:08:43: That big it's almost an administrative distraction.

00:08:46: exactly like The Hollywood blockbuster ecosystem.

00:08:48: oh

00:08:48: how so well.

00:08:49: movie studios much Like LPs they only want to fund the massive perceived safe sequels.

00:08:55: They'll pour hundreds of millions in DeFast and Furious twelve or the next Marvel Movie because the downside feels protected.

00:09:01: But doing that starves the innovative mid-budget films of any capital.

00:09:05: Oh

00:09:05: that makes total sense

00:09:06: right.

00:09:07: But by starving the middle market, these mega funds are basically engineering their own diminished returns.

00:09:14: They're forcing themselves into auctions where the only way to win is to pay twelve or thirteen times EBITDA which kills operational alpha and just replaces it with levered beta.

00:09:24: Right!

00:09:25: Which makes the contrarian approach shared by David Weisberg incredibly compelling.

00:09:29: What's the approach?

00:09:30: So he pointed to Stuart Wah at Northleaf Capital Partners.

00:09:33: They made the explicit strategic decision to cap their firm's assets under management, at thirty-one billion dollars.

00:09:41: Cap

00:09:41: their AUM.

00:09:42: I mean that almost heresy in private markets

00:09:45: It is.

00:09:45: but entire logic behind it.

00:09:47: That two hundred and fifty to three hundred million dollar check size is where actual mispricing still exists, right?

00:09:54: It's where you can negotiate bilateral deals without facing a fully banked broadly syndicated auction process.

00:10:01: Yeah by refusing to scale endlessly they actually protect their ability to generate real alpha.

00:10:07: but if traditional LP capital like the endowments and pensions, is either tapped out by the denominator effect or flowing exclusively to the megafunds it leaves a massive funding void in middle market.

00:10:20: Yeah but someone has to fill that void...and the entities stepping up are completely rewriting the rules of capital formation because with traditional LP capital constrained we're seeing a massive structural shift.

00:10:35: Yeah, Ronald Diamond made a really fascinating claim about this.

00:10:38: He said large family offices have grown so sophisticated and they're so heavily capitalized that They are now competing head-to-head with traditional PE sponsors for platform companies And top AI talent.

00:10:49: Wow!

00:10:50: ...and the enter these bidding wars With massive structural advantage over a traditional PE fund.

00:10:55: Right because of permanent nature of their capital.

00:10:57: Exactly...they don't have ticking clock.

00:10:59: A family office can buy an exceptional compounding business and just hold it for twenty years.

00:11:04: They completely bypass the friction of a forced exit at year five, they avoid massive tax hits, sell side advisory fees refinancing costs all disruption to management team that typical PE fund requires.

00:11:20: Right,

00:11:20: and the allocation data completely validates that narrative.

00:11:24: Aaron Civitarius noted that seventy percent of family offices are now executing direct deals on their own.

00:11:30: Wow!

00:11:31: Seventy percent.

00:11:32: Yeah, and even more telling, eighty-three percent of those family offices are utilizing co-investments to bypass traditional fee structures.

00:11:40: That's

00:11:40: huge!

00:11:41: So as they build out their internal deal teams... ...their intended allocation to traditional PE funds is actually dropping materially this cycle moving from twenty two percent down to seventeen percent.

00:11:51: I mean there disintermediating the GP.

00:11:52: Yeah, Family Offices were taking a direct route but we're also seeing massive wealth management channels flooding into space through new structure.

00:12:00: Charlotte Hogg pointed that the realisation of private markets is just accelerating wildly.

00:12:04: Semi-liquid evergreen funds, which are designed specifically for wealth investors.

00:12:08: instead institutional allocators.

00:12:10: they're now approaching five hundred billion dollars in total assets.

00:12:14: That's wild!

00:12:24: just

00:12:31: about where GPs are finding new capital.

00:12:33: It's about how they're monetizing themselves,

00:12:35: right?

00:12:36: Saranya S. Pei highlighted a landmark filing in India.

00:12:40: Godja Capital just filed for a five hundred and fifty crore IPO

00:12:44: like a portfolio company.

00:12:46: No that's the thing.

00:12:47: we aren't talking about.

00:12:48: them.

00:12:48: taking a portfolio Company public The private equity manager itself is listing on the Public Exchange.

00:12:53: Oh

00:12:53: wow so public market investors Aren't buying into specific pool of underlying assets They're buying the actual management company

00:12:59: exactly.

00:13:00: They're purchasing the future fee stream and the generalized carry of the GP.

00:13:04: It's the first case of a PE firm taking this specific route in India, And it forces complete re-evaluation of alignment.

00:13:11: Oh totally!

00:13:12: Because traditional ten year closed end fund model was explicitly designed to align the GPs financial incentives with LPs investment outcomes.

00:13:21: Yeah...and if family offices have infinite hold periods and evergreen vehicles eliminate the forced deployment clock.

00:13:29: And now GPs can raise permanent capital from public markets to fund their own corporate balance sheets.

00:13:34: Yeah The traditional ten-year model looks fundamentally obsolete for a huge portion of the market.

00:13:40: I mean does the historic alignment even survive?

00:13:43: A public listing?

00:13:44: that

00:13:44: is the critical vulnerability right there if a GP is publicly traded Their primary fiduciary duty is to their public shareholders not necessarily they're LPs,

00:13:53: right?

00:13:54: do they start optimizing their deal flow for quarterly earnings call?

00:13:57: Exactly.

00:13:58: Do they prioritize public market approval rather than long-term portfolio performance, do they time their exits just to manufacture earnings per share for the corporate reporting calendar... Yeah Rather then waiting for the optimal moment to sell the underlying asset.

00:14:12: It's

00:14:12: a huge conflict.

00:14:13: The structural alignment that basically built private equity industry is being heavily diluted.

00:14:18: Yeah I mean liquidity constraints are rewriting entire playbook The friction of unreturned capital fundamentally changing how deals are structured through NEV loans and secondaries.

00:14:29: It's changing who gets funded, driving extreme concentration into these mega funds.

00:14:35: And it is completely changing Who was doing the funding with family offices in retail wealth stepping in as the endowments pull back.

00:14:43: Yeah, and look at this sponsors who are pulling ahead in this environment or the ones adapting to that friction?

00:14:48: they're manufacturing liquidity without breaking their capital structures.

00:14:52: They're keeping their valuation discipline despite all the pressure to deploy dry powder And they're actively pivoting these new permanent capital sources.

00:15:00: yeah before you wrap up there was one final really fascinating irony.

00:15:05: buried into data perfectly encapsulates the pressure GPs are facing right now.

00:15:10: Oh,

00:15:10: what is it?

00:15:11: Well, Alexi Chernobylsky pointed out this growing trend where institutional LPs will immediately close a pitch deck and penalize a GP if they suspect that marketing materials were AI generated.

00:15:21: Wow

00:15:21: really yeah.

00:15:23: The allocators are demanding highly bespoke, deeply authentic human engagement when they're being pitched.

00:15:29: That's so funny because the operational reality of generating returns requires the exact opposite approach right now!

00:15:35: Exactly

00:15:36: the opposite.

00:15:36: Daniel Oszuzansler shared data showing that nineteen percent of the highest performing private equity funds or currently driving their outsized returns explicitly by integrating AI into their core value creation levers.

00:15:52: But the ultimate irony of this fundraising cycle is that PE firms must aggressively deploy AI just to save their portfolios and hit their targets, but they have to hide that cannability entirely when marketing themselves to the exact same investors demanding those returns.

00:16:08: That is wild!

00:16:10: You are required to be ruthlessly cutting edge in your underlying operations... ...but perfectly traditional almost artisanal even?

00:16:16: In your presentation to The Capital Allocators it just captures the contradiction of current market perfectly.

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