The Next Frontier of Fundraising

Along with the macroeconomic issues of the post-COVID era has come a noticeable shift in the private equity fundraising environment. The PE fundraising pool, which used to predominately consist of institutional investors, has now diversified to also include numerous high-net-worth individuals and family offices and, on the horizon, retail investors. Preqin, a provider of data and insights in private markets, has noted that, based on its investor surveys, a large proportion of institutional investors are planning on slowing the pace of their capital commitments to private equity, which may lead to a further increase in diversification and potentially a shift in investor pool dynamics.^[1]

The related burning questions are what are the underlying forces which have caused this shift and what impact have such forces had on the private equity fund market.

What Has Contributed to the Shift?

Historically, traditional institutional investors were the only ones who could write a cheque large enough to get an invitation to the private equity investor pool, because larger private equity funds generally required a minimum investment in the range of US$10 million or more, which amount would be locked up for at least 10 years. Private equity firms have now created various fund vehicles which allow for lower investment amounts and, in some cases, more latitude to exit before the end of life of a fund, which arguably has made PE funds more attractive to individual investors.

This shift may be attributable to the fact that many institutional investors have reached the ceiling of their allocation targets for private equity and, therefore, have no latitude to invest any further.^[2]

In addition, this trend of greater numbers of individual investors becoming investors in private equity funds could be related to the fact that private companies are generally staying private for longer (on average for more than 10 years), resulting in a significant portion of value being created outside of public markets.^[3] This is apparent by the slowdown in the number of IPOs – CPE Analytics reported that in the first nine months of 2024, only 12 IPOs were completed on the four Canadian securities exchanges (excluding capital pool companies and special-purpose acquisition corporations).^[4]

The volatility in the public market, particularly in the post-COVID era, may have also contributed to this shift, because individual investors are likely attracted to the controlled private market with historically higher returns in diversified sectors, as opposed to what is available on the public markets. Cambridge Associates U.S. Private Equity Index reported that on a net basis (after deductions for fees and carry), private equity outperformed public market equivalents over 5- to 20-year periods.^[5]

Structurally, there is less red tape involved when individuals and family offices commit their capital, versus the context for institutional counterparts, which often have strict investment mandates and approval processes to enable them to commit capital. Individuals and family offices have the ability to tailor allocations to their preferences, particularly with respect to liquidity, whereas institutional investors typically require consistent and incremental contributions and distributions in order to support their liquidity needs.

What is the Impact?

• Emergence of semi-liquid, evergreen funds and open-ended funds – These address the liquidity concerns generally faced by individual investors and family offices with the traditional private equity fund model, which model traditionally ties up capital for the life of a fund. Generally, these funds include a withdrawal or repurchase mechanism in favour of investors for all or a portion of the invested funds. Such liquidity rights are often subject to gate and suspension constructs, which act as restrictions to liquidity and have to be carefully considered by investors.
• Growth in digital platforms – These platforms are increasingly being launched and expanded with access to a variety of private investment offerings.^[6] As of July, 2024, Private Equity International identified 26 of such platforms. Of those platforms, 6 of them have independently raised in excess of US$1 billion (the largest and most notable one being iCapital, which has raised just over US$191 billion)..^[7] They generally have lower minimum commitments as compared to traditional funds, provide access to a curated set of funds which may not have been accessible by individuals previously and provide access to a number of educational and diligence tools to guide investors. These platforms, in some instances, only require a nominal minimum commitment (for example, Moonfare, which only requires a commitment of €10,000 for eligible ELTIF^[8] investors) thereby expanding access beyond high-net-worth individuals.
• Regulatory development – Regulation with respect to private equity funds is developing to facilitate investment beyond institutional investors. Barclays has cited the European Long Term Investment Fund 2.0 regulation as an example. This regulation has improved access to private market funds by introducing an evergreen, open-ended structure with lower minimum commitments and a streamlined distribution process.^[9] To the extent a significant number of individual investors access the Canadian private funds market, it is highly likely that we will witness the emergence of similar legislation in Canada as well, in the near future, in order to protect and regulate private funds investment made by such individual investors.
• Additional capital shifting to the private markets – Growth in the capital commitments of individual investors in private equity funds is projected to reach US$1.2 trillion by 2025 (up from US$500 billion in 2020 and US$200 billion back in 2015), with individual investors accounting for an average of 10.6% of the capital raised by private equity funds by 2025.^[10] A significant factor in connection with this growth can be attributed to the decline in the number of public companies with significant revenue – it is reported that fewer than 15% of U.S. companies with revenue over US$100 million are publicly held.^[11] Private assets offer investors a diversified portfolio for investment with attractive returns, versus the limited number of initial public offerings and the higher volatility of the public markets.

Although institutional investors remain the funding backbone of private equity funds, the gate is progressively opening to other investors of varying shapes and sizes. This likely means new investment models and offerings to address the key concerns which are novel to individuals as opposed to institutions and a potential growth in fundraising over the next few years, resulting in significant amounts of additional capital to be deployed in the private market.

^[1] See https://www.preqin.com/Portals/0/Documents/Event/Preqin-Future-of-Alternatives-2027-Australia-Event-2022.pdf.

^[2] See https://www.barrons.com/articles/wealthy-investors-will-boost-the-private-equity-sector-to-12-trillion-in-assets-688d9328.

^[3] See https://web-assets.bcg.com/01/cf/60d21c2340269d8ba580e12e7415/unlocking-the-art-of-private-equity-in-wealth-management.pdf.

^[4] See https://www.financings.ca/reports/.

^[5] See https://www.cambridgeassociates.com/wp-content/uploads/2023/10/WEB-2023-Q2-USPE-Benchmark-Book.pdf.

^[6]See https://www.privateequityinternational.com/digital-wealth-platforms-for-private-markets-whos-offering-what/.

^[7] See https://www.privateequityinternational.com/digital-wealth-platforms-for-private-markets-whos-offering-what/.

^[8] European Long-Term Investment Fund.

^[9] See https://privatebank.barclays.com/content/dam/privatebank-barclays-com/en-gb/private-bank/documents/insights/2024/September/private-markets-annual-report-2024.pdf.

^[10] See https://web-assets.bcg.com/01/cf/60d21c2340269d8ba580e12e7415/unlocking-the-art-of-private-equity-in-wealth-management.pdf.

^[11] See https://www.bain.com/insights/why-private-equity-is-targeting-individual-investors-global-private-equity-report-2023/.