INSTITUTIONAL “FUND” CAPITAL PROVIDERS ARE FULL: Bandwidth Constraints
Having trouble raising capital for a fund that focuses on investing the private capital markets? You are not alone!
Venture Capital funds are on pace to have the lowest funding level since 2017. In the first quarter of 2023, 99 venture capital funds raised a total of $11.7B which would equate to $46B raised by 300 venture funds for the year if fund raising continues at a similar pace. This is dramatically lower than the $170B raised by 892 funds in the full year 2022.
Private Equity funds have seen a 35% drop in fund raising in 2023 1H from same period 1 year ago. There has also been a 43% drop in terms of funds closed with full year 2022.
INSTITUTIONAL CAPITAL PROVIDERS HAVE
LIMITED BANDWIDTH
Almost more important than the limited liquidity that capital seekers are experiencing in these tough market conditions – capital providers have limited bandwidth.
Capital Provider limited bandwidth means that if a portfolio management team consists of 5 people and each person on the team can handle 20 funds. The team will only invest into 100 funds. They will not invest more than 100 funds because they do not have the bandwidth to handle more than 100 funds reporting and administration.
When liquidity was high and alternative asset portfolios were being built – the capital provider team had a low number of funds, and they had plenty of room to add another fund.
Now they have invested into their chosen “100” funds and will not be investing into more funds without exiting fund to make room for the additional fund allocation.
They likely have a “real” portfolio allocation of more than “100” funds since they have been tracking and conducting due diligence on funds into which they would like to invest for 2, 3, 4 or more years.
When large, well-known funds are successfully raising multi-billion funds – most of the fund capital is re-ups. Even the largest fund managers have trouble gaining new investors.
What is a Capital Seeker to do considering today’s market conditions and longer-term fundamental capital allocation realities?
Capital Seekers that want to raise capital for alternative private market funds need to be ready for these market conditions by having a continuous process of investor relations as well as capital ask. Best practices include building capital markets brand and virtual relationships.
Capital Providers consider “Time is Due Diligence” and it is important to be on the short list when one of the “100” maximum fund allocations is being replaced. There is no room for mistakes in the closing process and opportunities for closing capital will be few in any given period, so it is important to have considered the long term when being in and building an alternative asset management business.
