Private capital general partners (GPs) may experience some hesitation from limited partners (LPs) in response to rougher markets, but the data so far this year does not show a significant slowing in the time taken to close private capital funds. The median time to close dropped from 13.6 months in 2021 to 12.4 months YTD, the shortest median timespan since 2015.
Venture capital (VC) and private equity (PE) typically account for roughly 50 percent of global private capital fundraising, and this has not changed YTD. These asset classes responded differently to the market downturn this year. The VC industry bore the brunt of the initial stock market slowdown due to the more speculative nature of VC investments. VC firms responded by becoming stricter with their portfolio companies and pulling back on new investments. Despite significant dealmaking and valuation challenges in the industry, capital raised YTD by VC funds represents 87 percent of VC capital raised in 2021, suggesting LPs are confident that VC firms can manage the current stage in the cycle and still provide material returns over the long run.
With their larger pools of capital, PE firms saw a greater number of target companies with freshly lowered valuations available for purchase and improvement. In this way, the macroeconomic challenges that materialized in 2022 presented an opportunity for the asset class. PE funds have raised more aggregate capital this year compared with their VC counterparts and all other fund types examined; however, the total raised represents just over half the PE capital raised in 2021.
This year, smaller funds make up a lower proportion of total fund count, while the share of funds over USD one billion has increased, indicating that LPs are favoring larger, more experienced managers to a greater degree amid market uncertainty. This shift in LP preference is illustrated by first-time fundraising activity as well, which is lagging in aggregate USD value after growing 16.6 percent between 2020 and 2021. The number of first-time funds that have raised YTD is 293 compared with 824 last year. Each year since 2016, more than 800 first-time funds raised capital.
Total private capital dry powder declined from a peak of USD 3.7 trillion in 2020 to USD 3.2 trillion halfway through 2022. Capital reserves were deployed in greater quantity in 2021 when dealmaking and exit conditions were favorable. Funds are working with slightly less capital available now that dealmaking is less frenzied, and aggregate dry powder isunlikely to reach its 2020 level. Investors have felt pain this year, and fundraising efforts have decelerated in response, but looking at assets under management (AUM) can further contextualize short-term roadblocks. As of the end of Q2 2022, aggregate private capital AUM totaled USD 11.5 trillion, with remaining value representing 72.1 percent. Private capital investment remains a powerful vehicle for returns despite slower momentum this year as firms prioritize using their existing capital over raising additional funds.
John Denes - CEO - REO Capital, LLC