Best of LinkedIn: Private Equity: Fundraising CW 39/ 40

00:00:00: Provided by Thomas Allgaier and Frennus, based on the most relevant LinkedIn posts about private equity fundraising insights in calendar weeks thirty-nine and forty.

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00:00:18: The headline numbers right now are screaming that Private Equity is having this really solid predictable rebound this year.

00:00:25: Right,

00:00:25: on paper it looks fantastic!

00:00:26: Exactly...on paper.

00:00:28: but I mean if you actually dig into the fun flows and the structural shifts happening beneath the surface its honestly a brutal winner takes all bloodbath out there.

00:00:37: It really is yeah And that's exactly the reality we're cutting through today for ya.

00:00:41: Yeah We are bypassing the marketing fluff

00:00:43: Exactly.

00:00:44: Our mission for this deep dive Is to extract critical insights surfacing across This latest curated data set.

00:00:51: We're focusing on what you actually need to know about where capital is moving, how liquidity has been manufactured and what LPs are suddenly demanding from managers.

00:01:00: Right because the mid-market it's practically being starved and GPs are desperately engineering liquidity just to survive.

00:01:07: LPs have fundamentally changed in terms of engagement.

00:01:11: So let start with that macro environment right?

00:01:13: Because like I said looks a recovery.

00:01:16: It looks amazing if you only read the top line.

00:01:18: Based on the findings we're seeing from Nicola Ebbmeyer and Philip DeVuser, PE fundraising is absolutely on pace to rebound in twenty-twenty six.

00:01:26: Yeah I saw that

00:01:27: Right.

00:01:27: so were looking at four hundred forty five billion dollars raised year today which was up five percent.

00:01:32: And you've got ninety eight funds of a billion or more That closed by early September Which has seven percent bump.

00:01:39: But aggregate capital such deceiving metric isn't it?

00:01:42: Oh completely

00:01:43: Because while total capitals are The median fund size has just completely flatlined.

00:01:48: Yeah, it's stuck right around six hundred million dollars exactly

00:01:51: since twenty-twenty three.

00:01:53: and GPS who are trying to raise successor funds or seeing the smallest step ups in years.

00:01:58: I mean the median is slid down a one point four three X

00:02:01: Wow

00:02:01: so the wealth is definitely out being shared equally Right?

00:02:04: It's just consolidating at the very top

00:02:08: And Matan Feldman's data maps this consolidation perfectly.

00:02:11: I mean, look at the top three hundred firms.

00:02:13: over the last five years they raised a staggering three point five-five trillion dollars.

00:02:18: that is massive number

00:02:20: it Is.

00:02:21: but you have to Look At The Extreme Top Heaviness Of That Distribution?

00:02:25: The Top Ten Firms Alone.

00:02:26: So You Know Names You Know Like KKR EQT Blackstone.

00:02:30: They Account For About A Quarter of That Entire Total.

00:02:33: Wait!

00:02:33: A quarter just ten firms.

00:02:36: Yeah, roughly eight hundred fifty five billion dollars sitting with just ten managers.

00:02:41: because I mean think about it if you are an LP Nobody gets fired for reupping with a mega cap fund in a volatile market.

00:02:47: It's just a flight to perceive safety

00:02:49: Right which means the middle of the market is getting completely hollowed out.

00:02:53: yeah The oxygen is leaving room

00:02:55: exactly and Christian best will actually flagged an observation at the UK market that acts as this perfect microcosm For the global trend.

00:03:02: he noted that funds below one hundred and fifty million pounds plummeted from capturing five point two percent of total UK PE capital in twenty-twenty one down to just one point three percent today.

00:03:13: That is a brutal drop!

00:03:15: Yeah and that capital didn't just evaporate it was swallowed entirely by funds raising over seven hundred fifty million pounds.

00:03:22: so if you're mid market GP right now, its bleak

00:03:25: It really is.

00:03:26: And that extreme capital concentration creates this, uh... This massive structural hazard for the broader market.

00:03:32: Basically The ticking clock on dry powder.

00:03:35: Oh yeah, Christoph Tautter's point

00:03:37: right?

00:03:37: Exactly!

00:03:38: ChristophTotter points out there is one-point two trillion dollars of buyout dry powder sitting in funds globally and crucially about half of that sits in funds That are already Two to five years old.

00:03:50: So imagine you're a GP managing One Of Those Funds.

00:03:54: It's kinda like A Shot Clock In Basketball

00:03:56: Right?

00:03:56: Yeah, how so.

00:03:57: Well

00:03:57: when you have twenty seconds You run your carefully designed play...you set screens..You look for the high probability shot.

00:04:04: That's your proprietary sourcing

00:04:06: right which takes months to build relationships and find off-market deals

00:04:09: Exactly.

00:04:10: But when there are two seconds left on the investment period.... ...you don't run a play!

00:04:15: You just heave the ball from half court.

00:04:17: You just pray it goes in

00:04:19: Right.

00:04:19: So GPs are abandoning proprietary sourcings jumping into these rushed, intermediated auctions paying a premium just to get the capital deployed before the buzzer sounds and they lose their fee stream.

00:04:31: And I mean the psychology of that is terrifying but it's totally real because the speed of deployment in your subsequent performance directly dictates your firm survival on this environment.

00:04:42: The numbers back up right?

00:04:43: Completely!

00:04:45: brutal reality.

00:04:47: GPs whose prior fund returned above a twenty percent net IRR are closing their next fund in just six months.

00:04:52: Wow,

00:04:53: Six Months

00:04:53: Yeah.

00:04:54: But meanwhile though sitting below ten percent IRR languishing on the road for fourteen months and almost quarter of them missed target size entirely.

00:05:02: So either deploy fast deliver or you bleed out in fundraising market.

00:05:07: Basically yeah

00:05:08: but here's thing if traditional exits completely stalled And traditional fundraising is this heavily concentrated at the absolute top.

00:05:16: Where do the rest of the GPs and LPs actually turn for cash?

00:05:19: Because you can't just sit on aging assets forever!

00:05:23: You manufacture liquidity, that's the only way.

00:05:26: GPs & LPs are turning to secondaries in GP financing.

00:05:30: in numbers we haven't seen before

00:05:32: This scale is pretty historic.

00:05:33: yeah

00:05:34: It is.

00:05:34: I mean, Secondary's raised a record one hundred four billion dollars in twenty-twenty five.

00:05:38: it Is literally now the second largest PE strategy overall.

00:05:42: That's wild.

00:05:44: But its not just blind bulk buying anymore.

00:05:46: Jake Greenberg points out that The secondary market is fragmenting toward these highly specific purpose built vehicles.

00:05:53: Firms are realizing that blunt instruments Just don't work for niche liquidity needs

00:05:57: Right like that Winova fund

00:05:59: Exactly.

00:06:00: They just launched a one hundred million euro vehicle specifically targeting smaller like, One to fifteen million Euro LP led positions.

00:06:08: It's not just LPs trying get off the cap table though.

00:06:11: The GP financing boom is exploding alongside it.

00:06:13: Oh absolutely

00:06:15: Jed Johnson and Cedric Tessier highlighted that over eleven billion dollars has been raised in twenty-twenty six for GP financing across players like Aries, Arctos & Dawson.

00:06:24: And we need to be incredibly precise about what this capital is actually doing right?

00:06:28: This isn't a nav loan secured by the portfolio companies to fund an add on

00:06:32: exactly!

00:06:33: This is capital going straight into the management company itself.

00:06:36: Yeah, and Aries actually closed a debut fund at four point two billion dollars against day one billion dollar target just to feed this exact

00:06:44: demand.

00:06:44: Wow!

00:06:45: More than four times the target?

00:06:47: I mean think about the mechanics.

00:06:48: if your GP trying to raise fund for LPs are demanding you commit three percent of the total fun size to show alignment but your personal wealth is tied up in unrealized carry from Fund Two and Fund Three because exits aren't completely stalled

00:07:03: Right.

00:07:03: So you have a liquidity crisis at the GP level?

00:07:06: Exactly, so You take gp financing to fund your own commitment To seed new strategies or maybe to buy out a retiring founder.

00:07:13: But you know as this entire secondary and GP financing ecosystem grows It is leaning heavily on A very fragile pillar which Is the accuracy of reported NAVs.

00:07:24: Oh yeah that is a major issue.

00:07:26: Which brings up That mind-bending anecdote from Mustafa Siddiqui about The reality Of these marks?

00:07:32: The valuation gap?

00:07:33: The value, yeah.

00:07:34: Siddiqui noted this crazy situation where two different buyout firms co-owned the exact same portfolio company.

00:07:41: they both sit on the board

00:07:42: reading the exact Same Board materials

00:07:43: looking at the exacts in cash flows.

00:07:45: yet In the same quarter one GP marked the Company at point seven X and the other marked it At one point four

00:07:51: x. that is just insane right.

00:07:54: One credited a turnaround That was supposedly well underway while the Other judged It way too early to tell.

00:07:59: but

00:07:59: wait hold On.

00:08:01: If I'm an external secondary buyer or am in LP trying to underwrite a continuation fund, how am i supposed to confidently model A standard five-to ten percent discount when two insiders with literal board seats are Seventy percent apart on the underlying value.

00:08:18: Yeah It's a huge problem.

00:08:19: that just makes traditional Secondary math look like a complete guess doesn't it

00:08:23: well?

00:08:23: I mean secondary buyers aren't flying entirely blind right.

00:08:26: they do their own bottom up underwriting.

00:08:29: but your point is absolutely hits on why standard discounts are failing right now.

00:08:33: When reported nav can swing by thirty percent based purely on whether a GP is feeling optimistic or conservative about to turn around, pure mathematical models just break down.

00:08:44: you can't rely on equity discounts anymore

00:08:46: which Is Why We're Seeing A Shift Right.

00:08:48: Exactly That's Why we Are Seeing A Massive Transition Toward More Structured Solutions Like Preferred Equity To Bridge These Valuation Casems

00:08:57: because preferred equity completely changes the risk profile.

00:09:01: ShotCon and Fabrice Moyn were discussing how preferred equity has essentially become the ultimate family office product.

00:09:07: Oh, for sure.

00:09:08: I mean if you're an overcommitted levered family office You don't want to debate whether the mark is .

00:09:14: seven X or one point four X?

00:09:17: You just want a structured product that provides a fixed return sitting safely ahead of the GPS carry giving you downside protection while valuations remain this murky.

00:09:26: And I mean if you're an LP watching these valuations fluctuate wildly and you realize the GP's alignment might be funded by debt, You don't just sit on your hands.

00:09:35: No...you change your terms.

00:09:37: Exactly!

00:09:38: And that is exactly why LPs especially family offices are fundamentally rewriting their demands right now.

00:09:44: The bar has never been higher.

00:09:46: Chris Wyckowski data shows over ninety percent of tracked LPs are technically open to new manager relationships which Sounds great in a pitch deck.

00:09:55: But the reality is, the diligence process has become an absolute gauntlet.

00:10:00: Alexander Sen emphasizes that LPs just don't care about your mark-to-market TVPI story anymore.

00:10:06: Brand and Story no longer cut it.

00:10:08: Nope!

00:10:08: It's all about DPI now.

00:10:10: Exactly.

00:10:10: Distributed to paid end is the only currency that buys conviction in this market.

00:10:15: If you can show LPs real cash returns before asking them back their next fund You are dead on arrival

00:10:21: And the sophistication of these LPs is scaling up dramatically, which it really changes how capital has deployed globally.

00:10:28: Like look at Mariana Grossman's analysis of global pensions.

00:10:31: Oh!

00:10:32: The Canadian ones?

00:10:32: Yeah.

00:10:33: Canadian pensions absolutely dominate private markets.

00:10:36: allocation percentages you have OMERS sitting at a massive sixty eight point nine percent net investment exposure.

00:10:43: That Is Massive Right.

00:10:44: and then compare that to Singapore CPF Which sits At Zero Percent.

00:10:48: The Canadian model works because they don't just blindly commit capital to GPs and pay two in twenty.

00:10:54: Right, the build their own teams?

00:10:55: Exactly!

00:10:56: They have built massive internal deal teams... ...they co-invest heavily or they just bypassed the GP entirely and buy companies outright.

00:11:04: And you know that desire to bypass traditional fee structure and gain direct control is bleeding heavily into family office space as well.

00:11:12: Arun Jayne & Mike Auerbach noted that Family Offices within house investment staff are moving rapidly away from passive fund commitments.

00:11:20: Oh,

00:11:20: completely!

00:11:21: They want direct investments.

00:11:22: they want co-investments and in real estate specifically there demanding GP economics an actual decision.

00:11:29: rights for sponsors.

00:11:30: Hey by the way if you wanna make sure catch our ongoing analyses of these LP trends as it happened.

00:11:35: this is a great time to hit subscribe to The Deep Dive.

00:11:39: we track these structural shifts constantly.

00:11:41: Definitely do that.

00:11:42: And speaking of structural shifts Paul Stanton had this brilliant analogy for what's happening in real estate with these family offices.

00:11:50: Oh, I loved this one right?

00:11:52: He said nobody.

00:11:54: JVs were the restaurant and calls themself a restaurant

00:11:56: owner.

00:11:57: that perfectly captures The shift an alpha doesn't it?

00:11:59: It really does.

00:12:00: i mean four years real-estate returns word driven by macroeconomic tail width.

00:12:04: Right cheap leverage and cap rate compression was all financial engineering.

00:12:08: yep but With rates where they are today the Alpha has moved from the spreadsheet to the operating company itself.

00:12:16: Just look at Blackstone.

00:12:17: They didn't just joint venture with operators recently, they spent thirteen point five billion dollars in one year to buy operators like Tricon and AIR outright.

00:12:26: Wow

00:12:27: the return comes from The Daily Operations.

00:12:29: now so sophisticated LPs don't want a slice of real estate if you wanna own the operator.

00:12:35: Which brings us To the ultimate friction Point for GPs today.

00:12:39: because If LPs are demanding more control they're demanding actual cash distributions and bypassing traditional funds for direct deals, how do the best GPs actually prove their worth to secure that capital?

00:12:52: It comes down to undeniable skin in the game.

00:12:54: Exactly.

00:12:55: Deshaun Kendrick highlighted a fascinating stat that LPs are really zero-ing on... Funds where the GP commits three percent or more of total fund size actually outperform sub one per cent by about two hundred eighty basis points net IRR.

00:13:10: Yeah, because when the GP actually feels the pain of a capital call.

00:13:13: The underwriting gets a lot sharper

00:13:15: Totally.

00:13:16: But you know as Kendrick points out diligence for LPs isn't just about scanning the pitch deck For that three percent figure anymore.

00:13:23: they are forensically digging into how That commitment is actually funded.

00:13:27: Oh right?

00:13:27: The GP financing we mentioned earlier

00:13:29: Exactly.

00:13:30: If your GP commitment is funded by a third-party preferred equity loan that sits ahead of the carry, you're alignment is fundamentally faked.

00:13:38: The LP takes all the equity risk while the GP has capped their downside.

00:13:43: So LPs are demanding the legal documents actually match the marketing narrative.

00:13:47: And to stand out some GPs Are just breaking the standard economic mold entirely.

00:13:52: David Zhao pointed out some really rare structures being used to prove absolute alignment.

00:13:56: Yeah, I saw those.

00:13:58: We're talking about managers dropping to a point five percent management fee like barely enough to keep the lights on but taking twenty-five percent carry

00:14:06: Wow.

00:14:06: or structures where the carry doesn't even kick in until the GP hits two X DPI.

00:14:11: and Those structures force the GP to actually deliver massive cash returns before they see a single dime of upside.

00:14:17: It basically eliminates The ability to get rich purely off management fees on bloated.

00:14:22: AUM right But beyond just structural alignment, LPs are hunting for real battle-tested operational capability.

00:14:29: LimaCabe calls it the dangerous GP

00:14:31: question.

00:14:32: Oh I loved this framing.

00:14:34: He says when you're doing diligence don't ask to GP what is your value creation playbook?

00:14:40: Because that's just invites.

00:14:41: a fifty page slide deck full of buzzwords about digital transformation and synergies.

00:14:45: Nobody needs another deck.

00:14:47: Exactly.

00:14:48: You asked where do the last three operational improvements?

00:14:51: you personally drove.

00:14:53: LPs are hunting for scar tissue.

00:14:55: They want to know the names of executives you had to fire, they wanna hear about ugly board meetings what broke on factory floor and exactly your firm did when management aggressively disagreed with intervention.

00:15:06: Because LPs need a GP can fix fundamentally broken company when market multiples aren't passively rising to bail them out

00:15:14: Exactly.

00:15:16: And speaking of broken companies, Ed Stubbings offered a very candid-very rare playbook for what happens when a fund one investment is tracking to a total loss.

00:15:25: Like a literal zero.

00:15:26: point zero

00:15:27: X?

00:15:27: A literal zero yeah.

00:15:29: and his advice was bracingly simple sign post early be entirely transparent.

00:15:35: do not try to bury it in a footnote.

00:15:37: Yeah because the worst possible strategy a GP can deploy is hoping to breeze through a massive write down In a standard quarterly report and letting LPs discover the smoking crater during the diligence process for a re-up.

00:15:49: It's catastrophic, for trust

00:15:51: honesty builds so much more conviction than financial engineering.

00:15:55: it really does.

00:15:56: but you know that reminds me of Jeevan Kumar in a hawks breakdown of waterfall mechanics.

00:16:00: And I kind want to push back on this idea of simple economic alignment.

00:16:04: okay go for it.

00:16:05: let's say mathematically On a deal by deal spreadsheet A GP knocks out at other park and earns ten million dollars in carry on a specific transaction.

00:16:14: Isn't that just a theoretical exercise if we ignore the reality of whole-fund clawbacks and preferred returns?

00:16:21: Oh, it is entirely theoretical.

00:16:23: And LPs know this!

00:16:25: I mean... A waterfall calculation can be mathematically flawless on a spreadsheet ...and still be economically meaningless in reality.

00:16:33: If you have an European style hole fund structure That ten million dollar gain on DLA doesn't mean anything.

00:16:40: if deal C later goes bankrupt.

00:16:42: The GP might have to wait years to see a payout or face aggressive clawbacks If they were distributed early,

00:16:48: so true LP alignment isn't found in the headline.

00:16:51: twenty percent carry figure at all?

00:16:53: No it is found.

00:16:54: and the highly negotiated sequence And timing of that waterfall LPs are ensuring that GPs don't get paid until the entire fund as whole

00:17:02: okay?

00:17:02: So if we pull all this together look At where the industry stands right now.

00:17:07: We have an ecosystem sitting on nearly four trillion dollars in unsold companies.

00:17:12: Institutions are massively over-allocated and just desperate for DPI.

00:17:18: Exits are stalled, the middle market is being starved of capital And GPs literally using debt to fund their own commitments.

00:17:25: So building up an observation from Andrew Sachs What's the industry grand strategic solution?

00:17:34: Oh,

00:17:34: yeah.

00:17:35: Suddenly deciding it's the perfect time to open the doors of private equity to the retirement accounts of everyday retail investors?

00:17:42: Exactly!

00:17:43: I'll leave you to ponder what could possibly go wrong with pushing illiquid heavily marked assets onto retail investors right at the top of a massive liquidity bottleneck.

00:17:53: Yeah when institutional models get this clouded The innovative solutions often raise far more structural warnings than they actually solve.

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