Monday Market Minute | Nov 6, 2023

PE fundraising faces headwinds as LPs demand more for less

What Moved

The Canadian PE fundraising environment in 2023 was the most challenging in a decade. Established managers reported longer fundraising timelines, smaller fund sizes relative to targets, and more demanding LP terms. The culprit was a combination of the denominator effect (illiquid PE allocations growing as public portfolios shrank), the exit drought (LPs not receiving distributions to recycle), and competition from private credit (which offered comparable returns with less complexity). Several Canadian mid-market PE managers extended fundraising periods into 2024.

Why It Matters

The fundraising shift carried structural implications. LPs were using their leverage to negotiate lower management fees, hurdle rate adjustments, and improved co-investment rights. The era of "2 and 20 with no questions asked" was fading, replaced by a more rational pricing of PE economics. For HNW investors considering PE allocations, the environment favoured selecting managers who could demonstrate genuine operational alpha, not merely historical returns generated by favourable macro conditions. Discipline in GP selection had never been more important.

Signal to Watch

Whether the fee compression and structural concessions demanded by LPs in 2023 would become permanent features of the Canadian PE landscape, or whether a return to robust exit activity would restore GP negotiating power.

The Monday Market Minute is published weekly by Alts Insider for educational purposes only. It does not constitute investment advice. See our full disclaimer.