The Future of Fundraising: Private Markets Predictions for 2023 and Beyond
A confluence of spiraling inflation, rising interest rates and profound economic and geopolitical turbulence has left many investors hitting the brakes in 20221. That’s according to a report by McKinsey, but a marked slowdown in commitments is already making its way into the numbers. Last year saw 405 funds raise a total of $343.1bn. While the total amount raised is only slightly lower than the $362.9bn in 2021, that year saw 733 funds take part in fundraising activity, according to Pitchbook data2. Meanwhile, a Preqin model has predicted a further decline in activity for 2023.
These headline figures belie a more nuanced reality, however. Indeed, there are pockets within private markets that are poised to perform well and garner significant interest from investors as a result. Infrastructure, for example, is in some ways ideally positioned in the context of today’s macroeconomic turmoil.
Sectors Poised for Growth
Long-term contractual offtakes and concession agreements protect infrastructure, which could even benefit from rising inflation, while the essential nature of the assets make them more uncorrelated to GDP.
Furthermore, government support for two of infrastructure’s most compelling segments, the energy and digital transition, is immense. The Inflation Reduction Act is directing nearly $400bn in federal funding to clean energy, while the European Green Deal is seeking to mobilize €1tn of public and private sector investment. And, of course, infrastructure projects have typically been the first port of call for governments looking to drive economic recovery in any case.
Meanwhile, although real estate is more procyclical, opportunistic and value add strategies able to take advantage of undervalued assets may also prove popular in this economic context. Private credit demonstrated resilience in the aftermath of the global financial crisis, and distressed strategies in particular could generate outsized returns in a high interest rate environment.
The secondaries market is another potential winner. Overallocated investors and enhanced portfolio management in a downturn should eventually translate into increased LP-led deal flow, while the demand for GP-leds is well positioned to surge as alternative exit routes dry up.
We also believe that, particularly after the 2008 financial crisis, private markets investors now recognize the importance of maintaining investment pace through the cycle. Indeed, the incoming CIO of CalPERS recently acknowledged that putting key programs on hold during the global financial crisis probably cost the organization up to $18bn in possible gains.
And so, although it seems that 2023 will not be a year for breaking records, as investors revisit risk assumptions and grapple with technical constraints, underlying appetite for alternatives remains strong and potential opportunities exist.
Sectors Poised for Growth
Long-term contractual offtakes and concession agreements protect infrastructure, which could even benefit from rising inflation, while the essential nature of the assets make them more uncorrelated to GDP.
Furthermore, government support for two of infrastructure’s most compelling segments, the energy and digital transition, is immense. The Inflation Reduction Act is directing nearly $400bn in federal funding to clean energy, while the European Green Deal is seeking to mobilize €1tn of public and private sector investment. And, of course, infrastructure projects have typically been the first port of call for governments looking to drive economic recovery in any case.
Meanwhile, although real estate is more procyclical, opportunistic and value add strategies able to take advantage of undervalued assets may also prove popular in this economic context. Private credit demonstrated resilience in the aftermath of the global financial crisis, and distressed strategies in particular could generate outsized returns in a high interest rate environment.
The secondaries market is another potential winner. Overallocated investors and enhanced portfolio management in a downturn should eventually translate into increased LP-led deal flow, while the demand for GP-leds is well positioned to surge as alternative exit routes dry up.
We also believe that, particularly after the 2008 financial crisis, private markets investors now recognize the importance of maintaining investment pace through the cycle. Indeed, the incoming CIO of CalPERS recently acknowledged that putting key programs on hold during the global financial crisis probably cost the organization up to $18bn in possible gains.
And so, although it seems that 2023 will not be a year for breaking records, as investors revisit risk assumptions and grapple with technical constraints, underlying appetite for alternatives remains strong and potential opportunities exist.
$18bn
The incoming CIO of CalPERs recently acknowledged that putting key programs on hold during the global finance crisis probably cost up to $18bn in possible gains
Innovative Fund Structures
Private markets’ history of innovation also gives cause for optimism. Indeed, while institutional investment may be losing some momentum, many managers are actively positioning themselves to tap into the vast global mass affluent market.
Wealthy investors’ public markets portfolios have been hit hard, making the timing for private markets opportune for investors who are able to take advantage. Furthermore, while the administrative effort involved in onboarding hundreds of smaller ticket investors and the associated regulatory burden has historically proved prohibitive, firms are now increasingly pursuing partnerships with wealth managers and private banks, and a number of technology-driven platforms are also helping high-net-worth individuals access these asset classes. These initiatives could proliferate.
The so-called democratization of private assets is leading to new fund structures as well, with semi-liquid funds proving particularly popular. Interval and tender offer funds are technically closed-ended but offer share continuity. Many of the biggest private markets firms have already begun to pursue semi-liquid strategies and according to CEFData, aggregate assets under management in these funds have grown from $15bn in 2017 to $80bn at the end of 20213.
It is worth bearing in mind that question marks remain surrounding the liquidity available through these structures, but a desire to tap into this high net worth market remains strong and further innovation is likely.
Evergreen funds are becoming more popular, avoiding the drawdown drawbacks of the traditional private markets model. With certain evergreen funds, the investor is able to put money to work straight away, and immediately begin generating returns. These funds generally accept capital on an ongoing basis and have periodic redemption options.
There are also signs that regulators are looking to keep pace with these changes. Discussions are underway to amend Europe’s Alternative Investment Fund Managers Directive (AIFMD) to expand the definition of professional investors, for example. Indeed, it seems the stars could be aligning for high net worth exposure to private assets in 2023 or shortly thereafter.
Wealthy investors’ public markets portfolios have been hit hard, making the timing for private markets opportune for investors who are able to take advantage. Furthermore, while the administrative effort involved in onboarding hundreds of smaller ticket investors and the associated regulatory burden has historically proved prohibitive, firms are now increasingly pursuing partnerships with wealth managers and private banks, and a number of technology-driven platforms are also helping high-net-worth individuals access these asset classes. These initiatives could proliferate.
The so-called democratization of private assets is leading to new fund structures as well, with semi-liquid funds proving particularly popular. Interval and tender offer funds are technically closed-ended but offer share continuity. Many of the biggest private markets firms have already begun to pursue semi-liquid strategies and according to CEFData, aggregate assets under management in these funds have grown from $15bn in 2017 to $80bn at the end of 20213.
It is worth bearing in mind that question marks remain surrounding the liquidity available through these structures, but a desire to tap into this high net worth market remains strong and further innovation is likely.
Evergreen funds are becoming more popular, avoiding the drawdown drawbacks of the traditional private markets model. With certain evergreen funds, the investor is able to put money to work straight away, and immediately begin generating returns. These funds generally accept capital on an ongoing basis and have periodic redemption options.
There are also signs that regulators are looking to keep pace with these changes. Discussions are underway to amend Europe’s Alternative Investment Fund Managers Directive (AIFMD) to expand the definition of professional investors, for example. Indeed, it seems the stars could be aligning for high net worth exposure to private assets in 2023 or shortly thereafter.
Tokenization
Meanwhile, the democratization of private markets ought to lead to tokenization – although the large-scale adoption of blockchain for fundraising is definitely a longer-term prediction.
Tokenization involves dividing fund stakes into digitalized fractions, resulting in lower ticket sizes and easier onboarding; digitalized settlement for both subscriptions and redemptions and potentially an automated market where tokens could be freely traded, providing efficient price discovery and liquidity.
Indeed, the tokenization of global illiquid assets is predicted to represent a $16tn opportunity by 2030, according to a report produced by BCG and Asian private market exchange ADDX – and that is a conservative estimate4. In the best-case scenario, the report sees that figure rising to $68tn.
Significant hurdles remain when it comes to the tokenization of private markets, notably the lack of any regulatory framework. Scalability is another potential bottleneck. As alternative asset managers increasingly prioritize access to retail investors, the concept of blockchain as a facilitator is moving closer to reality.
$16Tn
The tokenization of global illiquid assets is predicted to represent a $16tn opportunity by 2030
Reasons to Be Optimistic
There is no denying that the macroeconomic environment is challenging. There are difficult times ahead. However, alternative asset classes today are anything but alternative – they are massive, they are mainstream, and they are multi-faceted. But they are “alternative” in the sense of providing alternative avenues to investing, even in down markets.
Many pockets within private markets are positioned favorably as we hunker down for the duration. A proven resilience can resonate well with investors, who recognize the importance of maintaining investment pace through the cycle.
Crucially, private market practitioners also have a long history of ingenuity and innovation, which is manifesting itself in new fund structures and an increased willingness to embrace technology in the fundraising process.
As a result, though the headlines may be discouraging, there are still reasons to be optimistic about private markets fundraising in 2023 – and beyond.
Reasons to Be Optimistic
There is no denying that the macroeconomic environment is challenging. There are difficult times ahead. However, alternative asset classes today are anything but alternative – they are massive, they are mainstream, and they are multi-faceted. But they are “alternative” in the sense of providing alternative avenues to investing, even in down markets.
Many pockets within private markets are positioned favorably as we hunker down for the duration. A proven resilience can resonate well with investors, who recognize the importance of maintaining investment pace through the cycle.
Crucially, private market practitioners also have a long history of ingenuity and innovation, which is manifesting itself in new fund structures and an increased willingness to embrace technology in the fundraising process.
As a result, though the headlines may be discouraging, there are still reasons to be optimistic about private markets fundraising in 2023 – and beyond.
Adrian Rae Leipsic
Partner
New York
T: +1 212 225 2504
aleipsic@cgsh.com
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Kenneth S. Blazejewski
Partner
New York
T: +1 212 225 2729
kblazejewski@cgsh.com
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