The COVID-19 pandemic had a significant impact on the funds market, with 2021 seeing record levels of funding and deal numbers. Funds were achieving their target size and even further reaching their hard caps (also known as the maximum fund size), indicating a strong appetite for investments in the market. However, this trend did not continue in 2022, with hard caps being rarely met. This shift in the market led General Partners (GPs) to explore new strategies to grow their assets under management (AUM) and meet their targets.
One of the strategies that GPs are increasingly using is offering co-investment opportunities at a record scale. This allows GPs to raise additional capital while also providing investors with an opportunity to co-invest in promising deals. Co-investing also allows GPs to share the risk with their investors, which can be an attractive proposition for LPs.
Another strategy that GPs are using is borrowing. Borrowing has traditionally been limited by a cap and a time constraint, but funds are increasingly allowing borrowing without a time limitation. The borrowing caps vary between funds, with some funds allowing as much as a 100% cap on borrowing. This flexibility in borrowing allows GPs to access additional capital quickly and can help them meet their investment or portfolio goals.
Recycling is another strategy that GPs are using to generate capital. Recycling allows GPs to reinvest capital returned from previous investments into new deals. There is a shift towards accepting the return of capital during the life of the fund, with a cap on the amounts to be recycled. This is different from the traditional approach of allowing recycling only 12 to 18 months from the return of capital.
In addition to these strategies, GPs are also focusing on differentiating themselves. This includes exploring different sectors such as healthcare, technology, and renewable energy, among others. GPs are also targeting different geographical regions, such as emerging markets, to generate capital. They are adopting different investment strategies, such as early-stage investing or value investing, and increasingly focusing on Environmental, Social, and Governance (ESG) factors in their investment decisions.
Overall, the funds market has undergone significant changes since the onset of the pandemic, and GPs are adapting by adopting new strategies such as co-investment, borrowing, and recycling to generate capital. However, the uncertainty of the market in 2023 suggests that GPs may need to continue exploring new strategies to ensure the success of their funds. The evolving nature of the funds market requires GPs to stay agile and adaptable to meet the needs of their investors and the market.
