What’s behind 2021’s fundraising rebound?

Fundraising saw a strong recovery in 2021 according to the latest PDI figures, but LPs are increasingly drawn to larger funds.

Fundraising activity has seen a solid return to form over the course of 2021 as the effects of the covid-19 pandemic begin to fade. As of the end of Q3 2021, private debt managers raised a total of $149.6 billion, well ahead of the same period of 2020 and on an equivalent level to both 2018 and 2019, according to the PDI Fundraising Report Q3 2021.

Last year was difficult for almost every industry, financial services included, and many managers reported not being able to meet with existing and prospective LPs, hampering attempts to raise capital. While many LPs were willing to use new innovations in online conferencing to virtually meet and make commitments to GPs they already knew, far less were willing to commit to unfamiliar managers.

The effect of this disruption can be most clearly seen in the number of funds that have been raised this year. An existing downward trend in fund size (and consequent increase in average fund size) has experienced a sudden acceleration in 2021. The number of funds raised fell to 160 from 264 in 2020 and down from an all-time high of 423 in 2017.

It appears that LPs are gravitating towards the established, big brand fund managers in the private debt industry. The average size of funds raised has reached almost $1 billion and there are many mega-funds populating the top ten vehicles raised in 2021.

The PDI 50 is due to be published in just a few days on 1 November and again we expect to see most of the same names dominating the top 10 as a select group of managers shows they are consistently able to raise tens of billions of dollars annually.

Private debt has proven it can handle a credit cycle, but the covid-19 crisis appears to be evolving into a more traditional period of economic turbulence with inflationary pressure and increased taxation likely to lead to slow economic growth. LPs are banking on the largest fund managers being the best equipped to manage portfolios of borrowers to produce reliable returns with an illiquidity premium.

In another indication that LPs are primarily looking for lower-risk investments, a growing proportion of the fundraising total is now taken up by senior debt funds, at the expense of junior debt and distressed strategies.

As 2021 draws to a close in the coming months, thoughts turn to next year and whether this year’s rebound can turn into long-term fundraising momentum and reach the heights seen in 2017.