The Future of Fundraising in Private Equity: Insights from PE Thought Leaders

By Kathy Zhao, Product Marketing Manager

In a recent webinar on The Future of Fundraising in Private Equity, Datasite invited PE thought leaders to share their insights on current fundraising trends and opportunities they see in the future. This webinar was supported by Pitchbook Insights, which detailed the current macro dynamics. According to the Pitchbook PE Market Brief on Fundraising, worldwide private capital fundraising has steadily grown year over year, leading to a high level of capital commitments and record levels of dry powder in 2021. Macro trends such as recovering economic growth and broader monetary policies in the past decade also contributed to record capital overhangs. As a result, fund managers are operating in an extremely competitive environment.

How to Stand Out in a Competitive Market

The COVID-19 pandemic accelerated this competitive fundraising environment. Garrett James Black, Senior Manager at Pitchbook, notes that established and emerging fund managers looking to raise subsequent vehicles are honing their competitive techniques, operational edges, strategies in the market, and looking to diversify into additional asset classes. According to Tom Boyle, Partner at Snowbridge Advisors, “fund managers can differentiate themselves by focusing on the strength of their teams, differentiating their teams’ expertise, emphasizing a history of working together and low team turnover.”

Tom also emphasized that it’s important for fund managers to have a focused strategy that occupies “a white space – a place in the market where they don’t face overwhelming amounts of competition.” For example, it’s difficult to raise an unknown VC fund, because most LPs are overallocated in VC since it’s been so successful. Another strategy for success is a unique sourcing ability to uncover investment opportunities others have not thought of. Finally, it’s essential for GPs to focus on building personal relationships with LPs.

Healthcare and Industrials in the Spotlight for Fundraising

We asked our panelists how their respective sectors fared during the pandemic, as well as long-term implications for their portfolios.

Carrie DiLauro, Director of Operations at Hamilton Robinson Capital Partners, reported that industrials and lower middle market firms performed well during the COVID dip, providing capital growth and preservation.

“All of our eight portfolio companies were deemed essentials, so we had no mass layoffs or closures. We did see an increase in interest in industrials during fundraising to round out LPs’ portfolio allocations.”

Throughout the pandemic, health care investing was at the forefront; healthcare venture fundraising reached a record high of 17 billion dollars. According to Katie Mangialardi, Associate at the Autism Impact Fund (AIF), the pandemic was a double-edged sword for impact investing. AIF invests in early stage services and life sciences that benefit the autism community.

“While the interest in impact investing was up, nearly 70% of investors are still expecting at-market returns. Recent market volatility and heightened investor scrutiny has made selling our thesis challenging. In the long run, this will help impact investors have longevity. But in the short term, it makes it harder for us to raise money.”

Garrett mentions that healthcare is a key focus area of many PE firms. “There’s been a lot of capitalizing in helping roll-ups and conducting regional strategies in some fragmented and niche providers. This is partially attributed to demographic changes and transition of ownership of private practices from Baby Boomers to Millennials.” He adds, “Healthcare and software are chief two areas of focus for private equity, and we also are seeing rapid growth in B2B and B2C.”

When surveying the audience on which sector will see the greatest increase in fundraising next year, their responses fell in line with many of the insights and experiences of our panelists.

ESG Continues to Grow in Importance for Both LPs and GPs

Across sectors, the role of ESG (Environmental, Social and Governance) is rising with 55% of GPs saying they’ve already included sustainable investment initiatives in their investing process, according to a recent PitchBook sustainability survey. Katie mentioned that from an ESG perspective, “LPs are focused on quantifying impact during due diligence.” LPs are looking at how AIF is quantifying impact in the autism community, and at how AIF’s impact aligns with the established metrics in the space. That creates an additional challenge in fundraising, but Katie believes that “for impact investing as a whole, this new layer of accountability in ESG is a step in the right direction.”

Carrie reports that the manufacturing and distributions space is evolving to meet investor’s expectations. “There’s no doubt that ESG is here to stay. It’s no longer a fad or a nice-to-have, it’s a must-have to be successful at fundraising.” In a recent Ernst and Young survey, 26% of investors today have a requirement to invest in socially responsible products, estimating that by 2022, 45% of investors will have this requirement. Carrie noted that “even the most diligent investors don’t expect you to achieve zero waste to landfill overnight. But they want to see the commitment, the KPIs and the metrics to prove you are taking steps in the right direction.”

We surveyed our audience on their familiarity with their firms’ ESG policies. It was somewhat surprising to see ~45% of the audience either unfamiliar with their firm’s ESG policies or stating that one was not present. However, on recent documented trends, this will likely shift as ESG continues to become table stakes for investors and fund managers alike.

The Digital Fundraising Trend is Here to Stay

With fundraising, we’ve seen that shorter times to close (even before the pandemic) have been influenced by technology. Garrett thinks that while part of the faster time to close is driven by LPs’ sheer demands, it’s also driven “by increasing efficiency, communications, handling of documentations, and clarity around fund mandate and investment strategy. This is all improved by the usage of data rooms.” This is the direction Garrett and his team at Pitchbook have seen large PE firms move. For mid-sized and emerging fund managers, he says “it’s become even more critical to find the right tool to help you achieve a similar level of operational efficiency and operational edge in working with your investor base.”

Carrie cites video conferencing, virtual datarooms, and databases such as Pitchbook as the top three technologies her firm uses to accelerate fundraising.

“The universal adoption of video conference is the most significant technological adaptation to fundraising over the past 18 months. It takes us an hour, instead of a 2-day road trip to diligence existing and new managers. We’ve also increased the use of datarooms. We use Datasite, and we’ve been really happy with the ease of use, and the cybersecurity that’s built into the system to safeguard our information.”

Tom echoed the sentiments shared, finding that technology has accelerated fundraising and due diligence. “A lot of fundraising is about information transfer” and with virtual datarooms and resources like Pitchbook, “both LPs and GPs take advantage of them. Finally, video-conferencing accelerates the process of introductory meetings and LPs and GPs getting to know each other.”

Katie remarks that “most importantly, technology allows us to be more intelligent investors, to see through the noise. From the perspective of quantifying impact, technology allows us to collect and monitor data, and as investors, we love data.”

Our audience agreed with the panelists’ forecasts, predicting that technology will continue to grow in importance, even post-pandemic.

If you’d like to go deeper into insights from Datasite and PitchBook, sign up to view the webinar. Or download our exclusive report, “Invest in Insight: Private Equity Market Brief on Fundraising.”

Data Source: Datasite webinar presented with PitchBook, "Navigating the Future of Fundraising in Private Equity", June 2021.