The Rabid Capitalist

Professor Glenn A. Okun

NYU Stern School of Business

August 7, 2023

In an indication that the private equity industry is dealing with the most challenging fundraising environment in memory, private equity funds are increasingly providing incentives like fee discounts to attract the support of wealthy investors.  This spells trouble for players who rely on these capital providers, including investment banks, transaction-oriented corporate lenders and publicly traded asset managers with significant private equity fund businesses.

In recent months, top tier general partners have provided investors with either a reduction in management fees or other incentives like bigger amounts of so-called co-investment.  Some funds are even giving major donors like sovereign wealth funds and pension plans a share of the management fee that traditionally goes to the fund manager.  Globally, businesses raised $517 billion in the first half of 2023, a 35% decrease from the same period a year prior.

High acquisition multiples combined with a reduced availability of debt financing that has greatly increased in cost and a collapse in M & A and IPO transactions upon which private equity relies in order to realize their returns on portfolio company investments have damaged fund returns.

Large limited partners, including California State Teachers’ Retirement System and California Public Employees’ Retirement System, have reported negative returns from their private equity fund investments over the past year despite a surging public equity market.

The fund-raising crunch is likely to continue.  Some limited partners rely on cash distributions from existing private equity funds in order to make commitments to new funds.  The excess asset allocation problem (the denominator problem) will persist despite the stock market rebound due to write downs and write offs in real estate and venture capital portfolios. Attractive risk adjusted returns from publicly traded asset classes will compete successfully for institutional capital, causing asset allocation reductions to private equity.

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