Some of the most influential investors are giving the world’s largest private equity firms a message: if you want money for your next fund, here’s our list of demands.
Sovereign wealth funds and state pension providers are among investors telling money managers they’ll only commit in their upcoming fund raises if their capital tied up in old funds is released, according to people with knowledge of the matter.
Additional requests range from fee discounts and more co-investment opportunities, to greater information rights and representation on committees, the people said, asking not to be identified because the requests are private. Some are even asking for a cut of the fund’s management fee or an opportunity to buy a stake in the fund manager, the people added.
“We’re now undergoing a real cultural change,” said William Barrett, managing partner at Reach Capital, a private-market fundraising firm. “It’s the first time we’re seeing LPs being so straightforward and linking a distribution from one fund to a new commitment in another. They’ve never been so precise with their asks.”
The relationship between private equity firms such as Blackstone Inc. and Apollo Global Management and their backers is symbiotic. Large fund managers cannot scale their platforms without money from the biggest so-called limited partners, while the investors need managers with the capacity to accept large swathes of capital.
But the balance of power is shifting within the $8 trillion private equity industry as buyout funds struggle to return money to investors amid disagreements between buyers and sellers over corporate valuations. That’s handing more power to LPs to dictate the terms of engagement.
As money rolling into private equity slowed last year, the heft of a handful of funds who make the majority of investments into private markets — such as sovereign wealth funds from the UAE, Saudi Arabia, and Qatar — has become even more persuasive.
Just five years ago, funds from the Middle East didn’t make the top 10 state-owned investors of private markets, according to data from Global SWF. By 2023, five were from the Gulf — including Abu Dhabi’s ADQ and ADIA.
In some circumstances, funds including ADIA and Singaporean sovereign-wealth fund GIC are among investors specifically asking for distributions to be returned to them from older vintages as they discuss upcoming fundraises, some of the people said. To be sure, one person familiar with the matter said GIC makes selective investments into new funds without taking capital from previous vintages.
Other requests from some SWFs include demands for more disclosures about the underlying assets in portfolios, the people said. The investors are asking for more information about their investments than ever before, with demands sometimes coming weekly, some of the people said.
Representatives for ADIA and GIC declined to comment.
US PE exit activity fell to an unprecedented low last year relative to the industry’s horde of capital under management, according to Pitchbook, with the current median holding period of investments exited reaching 6.4 years, the highest in more than a decade. This year’s forecast indicates that buyout fundraising is expected to be approximately 30% below its current linear trend, Pitchbook data showed, while trailing 12-month buyout fund distributions through the first quarter of 2023 hit their lowest level since the global financial crisis, the data said.
“It’s a tough market and LPs are using the leverage they have, particularly the largest investors of private credit, such as the sovereign wealth funds, and state pension plan funds, Barrett said. “Fund managers have to fight for their dollars now and investors know this.”
Investor Money
One commonly used justification for LPs asking for cash back is the so-called denominator effect. Where the value of assets from real estate to public stocks have proven volatile in recent years, private equity valuations have largely remained steady — at least on paper.
This has meant that in some instances investors have liquidated private holdings to avoid breaching allocation guidelines designed to safeguard the long-term safety of funds. That’s combined with many institutional investors from Singapore to Canada becoming more conservative.