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The Four Dynamics Shaping Global Private Markets

September 2022

What are the most important dynamics shaping the global private markets industry today?

I would highlight four:

Primary fundraising is extremely challenging
Consolidation is transforming the strategic landscape
The difficult macro environment is necessitating novel liquidity solutions
Crypto is emerging as an institutional asset class

These four dynamics present urgent and existential risks to fund managers, and they demand immediate action.

Here’s the Portico house view.

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1 / Primary fundraising is extremely challenging
When Portico opened its doors six years ago, two foundational trends were abundantly clear: (1) capital was concentrating in fewer, larger firms; and, (2) the outlook for EM-focused funds was dour, indeed.

The fundraising landscape has only gotten more challenging, with most capital flowing to North America and funds greater than $1B in size.

To wit, annual fundraising flows in North America grew by $300B between 2016 and 2021, increasing the region’s share of global fundraising from 51% to 62%. The volume of funds going to Asia and the “Rest of World” category (RoW) declined by $65B (28%).

Funds greater than $1B in size also attracted an incremental $300B in annual flows, increasing their market share from 56% to 66%, while fundraising for vehicles less than $500M in size declined by $23B (9%).

Since 2018 there has been a dramatic step-up in the duration of fundraising campaigns in Africa, Central & Eastern Europe, Latin America, and South & Southeast Asia. In these geographies, managers can expect to spend two to four years on the road before reaching a final close.

The extension of timetables can’t be explained solely by Covid-19, as the campaigns for North American funds increased negligibly: from an average of 15 months to 17.

Our conversations with investors suggest LP appetite for funds in the broader EM complex is de minimis.

‘Sub-scale’ vehicles (i.e., < $500M) in North America and Western Europe are becoming a heavier lift as well — even for established firms with competitive track records.

More generally, LPs have been slogging through a backlog of re-ups from existing managers, limiting their appetite and bandwidth for new relationships.

Looking ahead, the ‘denominator effect’ is likely to reduce fund commitments over the medium term as LPs seek to hit their target allocations over time and offset the discounts they face in secondary markets.

Alas, the feast-or-famine fundraising environment we described six years ago is getting harsher.

And this is happening at a time when the competitive landscape is growing in intensity — more than 7,500 funds were in the market last month, up from roughly 3,000 at the end of 2016 (Preqin).

Primary fundraising is not impossible.

But the pressures on managers operating in complex markets — or simply offering sub-$500M funds — are immense.

Success requires an uncommon degree of grit, a clear elucidation of one’s differentiation, and an investment in educating LPs on one’s opportunity set.

You need to stand out and stand apart with a clear edge and a compelling story.

Given this backdrop, we have revised and updated our Insider’s Guide to Raising a Fund: The Art of the Pitchbook, and are now making it available *for free*.

As one LP put it to us, “Portico is kind of giving away the house with this.”

Visit porticoadvisers.com/pitchbook to grab your copy.

And if you already have a deck, engage us for an in-depth pitchbook review.

We bring a fresh set of eyes and provide “invaluable” feedback — if it saves you one month of time on the road, the exercise pays for itself.

E-mail me at mike@porticoadvisers.com to get started.

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2 / Consolidation is transforming the strategic landscape
Scale matters.

Large asset managers are using M&A to marry differentiated strategies and geographic reach with their strengths in distribution.

This is exacerbating the fundraising pressures besetting sub-scale managers and creating existential franchise risk.

It is hard to overstate just how urgently firms should be exploring M&A and joint ventures as a means of survival.

Some prevalent strategies:

Sell to a private markets firm — Consider Apollo’s acquisition of minority stakes in two premier specialist firms that could continue to raise stand-alone funds: Motive Partners (fintech) and Sofinnova Partners (life sciences).

Or, consider EQT’s acquisition of Baring Asia — which is reportedly on track to raise $11B for its eighth flagship fund (Fund VII was $6.5B) — and LSP (life sciences).
Sell to a traditional asset manager — Enable or extend the private markets capabilities of public markets-oriented firms. Examples include T. Rowe Price’s acquisition of Oak Hill Advisors and Franklin Templeton’s acquisition of Lexington Partners.
Combine with another manager — Increase scale and strengthen your competitive positioning with a peer that offers geographic reach or complementary capabilities. One example is Patria’s combination with Chile’s Moneda Asset Management (discussed here).

According to data from Piper Sandler, there have been 288 acquisitions of alternative assets firms since 2018, roughly 40% of which were private equity firms.

If you’re a fund manager, you really need to grapple with two questions:

Does your firm still have product-market fit, or are you selling a product the market’s no longer buying?
How would M&A, a JV, or a strategic partnership improve your firm’s fundraising prospects and rerate its equity value?

Your ability to retain talent hinges on your ability to raise capital.

There are large asset managers that will poach your best dealmakers to bolster their capacities in a given geography or vertical, and leave you in a lurch.

The clock is ticking.

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3 / Difficult macro backdrop calls for novel liquidity solutions
Inflation, rising rates, energy, and geopolitics are leading to increased uncertainty and a slowdown in exits.

Strong firms are embracing creative strategies to generate distributions.

One of the primary ways they’re doing so is via secondaries. According to Lazard, the volume of GP-led secondaries grew from $7B to $63B between 2016 and 2021.

Though GP-leds have been concentrated in North American buyouts, there is substantial room for managers operating growth & VC strategies — as well as those active in other geographies — to harness secondaries.

Continuation funds — whether single- or multi-asset — have emerged as the predominant choice for sponsor-led secondaries, though tender offers, strip sales, and preferred equity deals remain viable.

While only 20% of GP-led secondaries included a primary staple last year, the ability to distribute capital is becoming ever more important given the grueling landscape for primary fundraising.

If you’re a fund manager, you should be scouring your portfolio to identify potential candidates for a novel liquidity solution — especially if you are in a fundraising campaign or embarking on one soon.

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4 / Crypto can't be ignored
Despite price volatility, regulatory uncertainty, a profusion of poorly written code, and an astonishingly vast number of scams and scumbags, crypto is emerging as an institutional asset class.

It is sensible to be skeptical.

You definitely should *not* go buy a bunch of tokens.

Nevertheless, Portico believes this will be the decade of digital assets, and that crypto provides new rails / primitives for transformational business model innovation.

The value of equity rounds and M&A activity in the sector has exploded, reaching nearly $90B in total in 2021 (PwC).

LPs have taken notice: crypto-focused funds raised ~$19B in 2021, coming within a whisker of the $20B that all private markets strategies raised for the ‘RoW’ geographies.

Unsurprisingly, large incumbents, such as Apollo, Bain, Blackstone, and KKR are building knowledge and capabilities in the space to meet LP demand and seize early-mover advantage.

Just yesterday, KKR announced that it is tokenizing interests in its Health Care Strategic Growth Fund II on the Avalanche chain.

Admittedly, some investors have been too credulous, moved too quickly, and made embarrassing and costly decisions (e.g., CDPQ and Celsius, Galaxy Digital Holdings and Terra / Luna). These are cautionary tales, indeed.

Crypto is the Wild West, but it is the largest ‘emerging’ market.

If you’re not developing knowledge or recruiting talent in the space, why not?

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Take action!
What is to be done?

Four suggestions:

Invest in LP education, differentiation, and the institutionalization of your firm
Explore JVs and M&A opportunities
Identify creative ways to generate distributions
Develop knowledge on crypto and recruit talent in the space

Portico can help.

I would love to learn about the latest developments with your business and your plans for the future.

Let’s talk.

— Mike
mike@porticoadvisers.com

Download this report as a PDF

Download the Slides

Insider's Guide to Raising a Fund

Be sure to grab your *free* copy of our revised and updated guidebook.

As one LP told us after reviewing it:

This is great!

Most GPs are struggling enough as it is, and they tend to approach us when their materials and pitch are too raw.

This guide — coupled with an in-depth peer review — will help managers get to the point where they’re in good enough shape to pitch us.

Or, as another LP told us:

This will step up GPs’ game a lot.

We see a lot of pitchbooks that look like business plans, with very little thought into how the story sticks together.

Grab Your Free Copy

Ben Fanger on Distressed Debt in China

China's overleveraged property developers are once again in the news.

You'd be well served to listen to Episode 16 of the Portico Podcast, which features an interview with Ben Fanger.

Ben is the Managing Partner and Founder of ShoreVest Partners, an investment firm that specializes in Chinese distressed debt and opportunistic credit.

I encourage you to have your pen and paper at hand because you are going to want to take notes — this conversation is both broad and deep.

Grab Bag

CEE data and statistics (InvestEurope)
Tariq Fancy releases an epilogue to his Secret Diary of a Sustainable Investor. (Listen to our podcast with him here)
Debevoise on the applicability of the SEC’s proposed ESG rules to private fund advisers (link)
Simon Clark on Arif Naqvi and the funding of Imran Khan from Abraaj’s accounts (FT; listen to our podcast with Simon here)
Afropolitan raises millions to build a digital nation (TechCrunch; revisit our podcast with Atlantica Ventures here)
🎵 Fred again.. at Boiler Room: London (YouTube)

From the Bookshelf

The rock is like the surface of the sea, constant yet never the same. Two climbers going over the identical route will each manage in a different way. Their reach is not the same, their confidence, their desire. Sometimes the way narrows, the holds are few, there are no choices — the mountain is inflexible in its demands — but usually one is free to climb at will. There are principles, of course. The first concerns the rope — it is for safety but one should always climb as if the rope were not there.

…

One must know the mountains. Speed and judgment are essential. The classic decision is always the same, whether to retreat or go on. There comes a time when it is easier to continue upward, when the summit, in fact, is the only way out. At such a moment one must still have strength.

— James Salter, Solo Faces
(North Point Press: 1988)

About Portico

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We build long-term partnerships with founders who possess an uncommon measure of vision, courage, and grit, and share our commitment to ethical business practices that elevate human dignity.

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