Key Takeaways

Buyout and Venture Capital fundraising cycles have accelerated in recent years, with General Partners (GPs) raising new funds at close to a record pace. However, the Burgiss Manager Universe (BMU) data through Q3 2022 signals a slowdown in Venture Capital fundraising.
A Limited Partner’s (LP’s) commitment to one fund from a GP also creates a soft agreement to commit to the GP’s future funds. The shortening gap between funds can pose a challenge for LPs who are making pacing decisions.
New funds are also growing larger than the funds they succeed. This is especially true for Venture Capital funds, where the average vintage 2022 fund raised 60% more capital than its GP’s predecessor fund.

When an LP commits to a GP’s fund, both parties generally expect that the LP will also invest in the GP’s subsequent fund(s). Fundraising that is evenly spaced creates a relatively predictable series of cash flows for the LP. For example, an LP may expect to commit to a new fund from a given GP every three years; with that predictability, the LP can feasibly assemble a portfolio where the distributions fund the capital calls, thereby creating a self-financing portfolio. However, recent trends in private capital fundraising are complicating this delicate balancing act. Using data from the BMU, we can quantify how much faster the private capital fundraising cycle is spinning than in previous years.

In this blog post, we consider two aspects of fundraising that make pacing decisions a challenge for LPs: (1) the speed with which GPs return to the market with follow-up funds, and (2) the size of those funds. Figure 1 captures both factors, but we will start with the first one. Just prior to the dot-com era, Buyout and Venture Capital follow-up funds were formed an average of 3.2 years after their predecessors.[1] However, between 2001 and 2004, fundraising dried up (at least relative to the dot-com era). Those “missing” follow-up funds had to wait until around 2005 to reenter the market,[2] creating a mass of follow-up funds with unusually long inception gaps. The fundraising cycle accelerated until the onset of the global financial crisis (GFC), at which point fundraising came to a standstill. While it was common for GPs to wait less than 2.5 years to raise a follow-up Buyout fund in 2007, almost no GPs operated on such a short fundraising cycle between 2010 and 2015.[3] Since then, Buyout GPs have returned to the pre-GFC fundraising pace; as of the end of the third quarter of 2022, there is an average of 3.5 years between funds. In Venture Capital, the fundraising cycle neared record speeds in the second quarter of 2022, approaching just two years between one fund and its predecessor. However, after the asset class posted multiple quarterly negative returns in 2022, Venture Capital fundraising began to stall in the third quarter.

While the above description focuses on the equity asset classes, the parallels between Real Estate funds and Buyout funds are apparent, at least through the post-GFC fundraising deceleration. Since 2014, GPs have raised follow-up Real Estate funds somewhat more rapidly, but the cycle remains much slower than it was prior to the severe housing downturn during the GFC.

Figure 1: “Fundraising gaps”—years since previous fund formation—over time. Dot size indicates the new fund’s size relative to its predecessor—larger dots correspond to new funds that are raising more capital than the previous fund in that GP’s series. Dots shaded in blue correspond to new funds that are more than twice the size of their predecessors. The blue line is a smoothed average of the fund-level formation gaps. The vertical grey bars denote U.S. recessions.

Having addressed the first challenging aspect of fundraising—the pacing—we now turn to the second: the size of the follow-up funds. The quick return of GPs to the market to raise new funds of the same size presents its own set of problems for LPs; successor funds that are much larger than their predecessors will exacerbate LPs’ pacing challenges.[4] In figure 2, we focus on how much bigger the follow-up funds are in comparison to their predecessors. A value of one, highlighted with a red line, indicates that a follow-up fund raised the same total commitment as its predecessor. In all three asset classes, we observe a tendency for follow-up funds to raise more than their predecessors, but this is especially evident in Venture Capital. More interestingly, the inflection points in fund-to-fund growth trends coincide with the fundraising pace shown in figure 1. When fundraising accelerates, fund sizes also tend to increase, creating a double problem for LPs.

Across the Venture Capital, Buyout, and Real Estate asset classes, funds are growing faster than they did in 2015. This is most apparent in Venture Capital, where the average follow-up fund is now 60% larger than its predecessor and the average predecessor fund is barely two years old. For comparison, in 2010, the average Venture Capital follow-up fund was 20% larger than its predecessor and took a year longer to raise.[5] As with the timing of fundraising, Real Estate funds have shown more stability since 2015, with only minimal growth. While the fund-over-fund commitments in Buyout declined after the GFC, they began rising again in 2015. Today, the average follow-up Buyout fund is 50% bigger than its predecessor and comes to market almost two years faster than in 2015. Again, the third quarter of 2022 suggests that the trend toward faster-growing follow-up funds may be pausing—or even reversing. This is somewhat more apparent in Buyout, where we suddenly see no follow-up funds raising twice as much money as their predecessors, but Venture Capital also appears to be leveling off. How this trend carries into 2023 will depend largely on the returns of each asset class.

Figure 2: Growth in fund commitments over time. For example, a dot at (2010, 2) indicates that a fund raised in 2010 was twice the size of its predecessor fund. The blue line is a smoothed average of the fund-level commitment multiples. The red line highlights a growth rate of one, meaning that a fund is the same size as its predecessor. The vertical grey bars denote U.S. recessions.
***Note:*** While we have limited the y-axis to a quintupling of a fund’s size over its predecessor, there were several Buyout funds between 2006 and 2009 that exceeded this growth rate. A smaller number of Venture Capital funds experienced growth between five and six times the size of their predecessors prior to 2000 and in 2020. They were omitted from this chart so as to focus on the broader asset class trends.

Conclusion

Private capital fundraising cycles are critically important to LPs when making pacing decisions. Across Buyout, Venture Capital, and to a lesser extent, Real Estate, the average amount of time that GPs take between raising one fund and the next has shrunk in recent years, whereas the average size of the follow-up fund has grown. While weaker returns in 2022 have somewhat slowed the fundraising cycle, it is still spinning at a challenging pace for LPs. As GPs come back to the market quickly and with larger funds, LPs need to be increasingly cognizant of their liquidity management strategies.

[1] By “predecessor,” we mean the preceding fund in that GP’s fund series. For example, Venture Partners Growth Fund II’s predecessor is Venture Partners Growth Fund I.

[2] Buyout funds were quicker to reenter the market after the dot-com bust, which makes sense given Venture Capital’s greater exposure to the technology sector.

[3] The obverse of the dot-com bust, Buyout was more exposed to the GFC; therefore, fundraising took longer to reach its pre-GFC pace than Venture Capital.

[4] In the extreme, LPs will have to consider whether to skip a GP’s follow-up fund to avoid over-allocating to a single asset class. This comes at the cost of potentially losing access to future funds from that GP.

[5] The average 2010 Venture Capital fund inception was 3.1 years after its predecessor.

Is Private Capital Fundraising Slowing?