Private equity firms are anticipating a tougher fundraising effort as market volatility hits both their own balance sheets and those of their institutional investors.
In recent earnings calls, some of the largest private equity firms remained bullish on deal-making opportunities in the current environment, even as market turmoil and rising rates lowered value of your holdings.
Exchange-traded fund managers posted significant earnings hits in the most recent three-month period, with at least four of the biggest firms (Apollo, Blackstone, KKR and TPG) posting losses for the June quarter . For Apollo, it was the second straight quarterly loss.
However, the value of private equity firms’ investments declined much less than the more than 16% drop during that period for the S&P 500, which also posted its worst first-half performance in more than five decades. And company executives said overall operating performance at portfolio companies remains strong.
Still, battered stock values created imbalances for institutional investors’ portfolios, in what’s known as the denominator effect, which many fear will hamper the flow of new capital into illiquid assets like equity private
Caspar Callerström, deputy chief executive of European buy-side giant EQT, for example, acknowledged on the company’s most recent earnings call that some clients, particularly in the US, had already reached their target allocation of private equity.
“As a result, new fund initiatives will take longer to raise in this market, and we expect existing clients to represent a large portion of our ongoing fundraising,” he said.
Callerström said the company had raised about two-thirds for its 10th buyout fund, which is targeting at least 20 billion euros, with a final close expected in 2023.
TPG CEO Jon Winkelried said the private equity firm accelerated the timing of the first closes of its large flagship fund, closing on a combined $10.6 billion for its ninth flagship private equity fund and its second fund focused on health, and with $1.6 billion for its third impact. investment fund. The firm is targeting a combined $18.5 billion for the first two and $3 billion for the impact investment fund, Winkelried said during an earnings call.
TO READ The PE sector gripped by deal fatigue
“On balance, similar to its peers, TPG recognized the ongoing extensions in fundraising timelines that have prevailed in the industry in recent quarters,” wrote JPMorgan analysts Kenneth B. Worthington and Michael Cho in a note on the company’s second quarter performance.
Meanwhile, GCM Grosvenor boss Michael Sacks warned that his latest secondary private equity fund, which is already 30% larger than its predecessor, may miss its original target due to the timing of the fundraising background
He expects the alternative asset manager to finish fundraising efforts for the offering by the end of 2022. Other specialty funds, he said, will continue to raise capital in 2023 and remain on track. GCM, he said, increased fundraising in the second quarter, adding about $2.1 billion in new capital.
Apollo raised $36 billion in the quarter, ahead of expectations, and raised about $13 billion more in the current quarter for its 10th flagship fund, BMO Capital Markets analysts Rufus Hone and James Fotheringham said , adding that the company is on track to surpass its fundraising. target of at least $80 billion across all strategies this year.
While some institutional investors face allocation limits and pressure from the denominator effect, StepStone Group head Scott Hart said some of the investment and advisory firm’s other clients are starting to build a portfolio of private markets, increasing allocation or accelerating the pace of deployment.
“For every conversation we’re having about the denominator effect, it seems like we’re having another one about launching a new private markets program or accelerating deployment in a private markets program,” he told a conference on the phone with analysts to discuss the company’s signature. Performance of the June quarter. “And that certainly gives us a certain level of confidence.”
Chris Smyth, head of private equity at EY Americas, pointed to the companies’ record performance through previous economic ups and downs and the more than $1 million in so-called dry dust, or money raised but not yet invested, as reasons for optimism.
“One of the things that PE has proven is that they are resilient,” Smyth said. “They bring that focus and speed to action to ensure they continue to generate differential returns.”
—Ted Bunker, Chris Cumming and Luis Garcia contributed to this story.
Write to Maria Armental at maria.armental@wsj.com
This article was published by Dow Jones Newswires, a service of the Dow Jones Group
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