Changes in the Marketplace Demand New Ways of Doing Business

Operating in the private funds landscape has become increasingly challenging in the past year due to a confluence of factors, including difficulty in raising capital, increased regulation and enforcement by the Securities and Exchange Commission (SEC) and continuing economic and geopolitical pressures.

The private funds that are navigating these challenges well are the ones that are re-evaluating some old methods of doing business and adding new tools to their toolboxes. But for most, it will be a matter of waiting out economic realities in 2024 until they are back on track.

Currently defining the rocky landscape are several factors, including:

• Sluggish fundraising: In 2023, fundraising activity slowed significantly. Fundraising totals dropped by approximately 22% compared to 2022, and the full-year fundraising total of approximately $1 trillion was only one-third of the amount sought by 13,900 private capital funds across various asset classes. This was the widest gap between supply and demand since the global financial crisis. But despite difficult fundraising conditions, headwinds did not affect all strategies or managers equally. Private equity (PE) buyout strategies posted their best fundraising year ever, and larger managers and vehicles also fared well, continuing the prior year’s trend toward greater fundraising concentration.
• Changing landscape: Traditional approaches to courting investors and relying on relationships are no longer sufficient. The industry’s clear signal to general partners (GPs) is that they need to professionalize their fundraising function. While strong performance and relationship-building skills remain crucial, effective fundraising now resembles the enterprise sales tactics used by large B2B sellers.
• Temporary imbalances: Some of the fundraising challenges are temporary. Limited partners (LPs) currently hold substantial unfunded commitments due to sluggish exit activity, resulting in overallocation to private equity. LPs are parked at the side of the road, waiting to merge in when distributions improve.
• Saturated market: The private equity landscape has become saturated with mega-funds, leaving little room for mid-sized and smaller funds. Those without the backing of extensive marketing engines may face an uphill battle to secure allocations from LPs.
• Barriers for private companies: As a result of the sluggish fundraising factor, private companies, especially smaller ones, are encountering difficulties accessing capital. Challenges include investor valuations, interest rates and liquidity constraints. A majority of private companies (88%) are grappling with these barriers.

SEC Regulation and Enforcement

Complicating the marketplace factors is a sharp increase in regulation and enforcement by the SEC.

In August 2023, the SEC adopted new rules and amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. These new rules reflect the most substantial overhaul of private funds regulation since Dodd-Frank in 2010.

Specifically, the new rules and amendments are designed to protect private fund investors by increasing transparency, competition and efficiency in the private funds market and will impact all investment advisors, including real estate investment managers.

These rules, combined with scores of other changes and additions to SEC oversight of private funds in recent years have resulted in a cascade of enforcement actions against private funds. Tighter regulation and heightened enforcement are likely to continue under the current SEC leadership.

The Road from Here

Navigating the landscape for the next year, at least, will require a willingness to re-evaluating some old ways of doing business and adding new tools to the toolbox.

• Scale up. Reaching investors in a meaningful way in this environment will take more than the traditional relationship-building tactics. It will take more interesting opportunities, more detailed analysis and more touchpoints. Some organizations are muscling up their investor relations teams to cover a universe of investors that has grown too large for the old strategies to reach effectively. Managing the process more strategically means segmenting investors, creating a differentiated, data-driven value proposition and optimizing your team.
• Link your strategy to your goals. Analyze each of your existing relationships and quantify what you can reasonably count on from each, drilling down to a detailed estimate of what is reasonably bankable. This will help identify how big a gap you need to fill to realize your growth goals, and how much of that gap can be filled by existing relationships.
• Differentiate yourself. This involves first ascertaining how you are perceived in the marketplace and – more to the point – by your current customers. This can be painful or surprising or infuriating. Regardless, it’s always helpful because it gives you a realistic starting point. You have competitors; you know that. Find out how your organization compares to them in your preferred marketplace. Potential customers are benchmarking your performance against your competitors, so you should know what they’re seeing. With the number of private funds increasing annually by 2.4% from 2018 to over 14,000 in 2023, it’s increasingly difficult to differentiate from the crowd and optimize capital-raising. Differentiating yourself and creating a value proposition that will be meaningful in the marketplace depends on showing what is unique about your firm’s performance and products.

How Anchin Can Help

These new rules are currently subject to lawsuits and are actively before the US Court of Appeals, therefore the challenges of operating in the private or alternative funds arena will likely continue and even grow. For further information about how these changes affect you and how you can respond to the challenges, please reach out to Alicja Mierzwa or your Anchin Relationship Partner.