Following very strong global fundraising in the private markets sector during 2021 and 2022, last year proved to be one of the harder global fundraising environments since the global financial crisis. Geopolitical uncertainties, higher interest rates, inflationary pressures and valuation uncertainty fed into less fundraising and less deal activity. Many large institutional investors also re-weighted down their private capital investment portfolios resulting in a rise in discounted secondary transactions, particularly in US markets.

Although this harshness was felt globally with many mega-funds not reaching their fundraising targets, 2023 still saw several successful Australian fund managers meet (and in some cases exceed) their fundraising targets which proved the resilience of the sector. Nathan Cahill and Rob Newham explore the different factors that will have an impact on the Australian private funds industry in 2024.

Deals and Deliverables 

The first three quarters of 2023 proved to be a quiet year for deal activity with a large number of deals coming to fruition in the third and fourth quarters. Ken Licence from Principle Advisory Services indicated:

“We are seeing a narrowing of the bid-ask spread in M&A deal pricing which created the spike in deal activity in Q4 of 2023. LPs are looking for their funds to not only make strong investments but deliver on their initial investment thesis and return capital to their LPs. We are expecting the second half of this year to bring an increase of fundraising activity once investors receive some liquidity from their current portfolio”.

There was a record low of 32 listings on the ASX in 2023, which has had many questions about when listed markets would re-open to normal levels. Equity capital markets specialist Adam D’Andreti commented:

“There are a large number of situations we are close to where we expect the IPO market will be tested soon. In fact, we have a number of clients who intend to test the IPO market in 2024 - particularly towards the second half of the year. There's a certain point where some of these exits will just need to happen and it is really important that vendors do the work early to be ready to take advantage of IPO windows. There have been a healthy number of IPOs getting away in the US and ASX has talked recently about what it is seeing in the pipeline locally too.”   

The rise of long-term holds

In addition to an expected surge in IPO exits, continuation fund and secondary activity will also continue their uptick. Many fund managers are questioning the logic of selling their prized assets, which is being met by investors with two attitudes. The first are those investors who require liquidity (eg they are a fund that has a fixed term) and the second, those who want to retain or gain, access to these quality assets. This has led to a surge in continuation funds in 2023, and this will continue into 2024, with a trend in moving from single to multi-asset continuation funds. A number of these funds are also employing technology to morph into long-term holding funds if investors prefer that. Previously stated concerns about conflicts of interest and pricing discipline particularly in the EU and US have dissipated as the model has evolved. Most transactions now involve lead investors negotiating terms and price which means that inferences that managers are negotiating with themselves is not the case in practice.

The role of alternative credit

Whilst liquidity in 2024 is expected to come from increased IPOs and continuation funds, alternative credit will also play an important role. 2023 saw strong Australian alternative credit fundraisings at a time w some banks continued to retreat from the private markets sector. This alternative credit will be important in 2024 to provide the leverage for purchasers of private market assets to buy assets from funds, and also to provide the in-fund leverage that many funds are employing. Somewhere in the order of 90% of private equity and credit funds are now employing in-fund loan facilities to aide liquidity and improve returns.

Prosperous Pockets

As securing allocations from institutional investors remains a fierce fight across the world, fund managers have been tapping alternative sources of capital in order to diversify their investor base and build on relationships that may also serve their portfolio companies. One pool of capital that is proving very popular with fund managers has been to raise capital from wealth aggregators and high-net-worth individuals.

Whilst this “new” source of capital is welcomed by fund managers, concerns have been identified by international regulators adjusting their own “professional investor tests” to determine what classifies as a “professional investor” under their respective local regimes. While these tests are under review in the EU and US, closer to home, the Australia wholesale client test (for individuals, $2.5million in net assets or at least $250,000 annual income) is currently being revised by ASIC which we expect to increase minimum wealth limits applicable to these investors. The Australian government has also recently scrapped the significant investor visas which provided foreign investors a route to permanent residence in Australia if they were to invest at least $5 million in Australia. While the ultra-wealthy are unlikely to be affected by these changes, those at the lower end of the wealth spectrum may no longer be able to gain access to many private market funds – which are nearly always only for wholesale clients. “We’re seeing the demand for private wealth investors not only from Australian managers but foreign fund managers that are looking to tap into this market.” Cahill comments.

“We saw several offshore managers last year raise capital from Australian high worth investor feeders in order to invest in that manager’s flagship funds, which proves that this source of wealth is on everyone’s radar. It is important that any changes to the wholesale client definition does not reduce the availability of important investment diversification.”  

Cost Conscious 

Rules regulating how superannuation and retail funds must disclose fees and costs of their investments (which also included the private markets) has meant that Australian superannuation funds have been particularly focused on keeping fees and costs as low as possible. This has also caused a drive for fund managers to be more transparent with respect to their own fee reporting, which is mirroring the US SEC’s stance on fee disclosure. “This pressure is starting to become more wide-spread globally” Rob Newham said:

“Other markets can learn from the Australian example where “shaming” of fee and cost disclosure has led to less focus on risk management and net returns for investors and more on low fee products like long-term ETFs. It is often the case that you get what you pay for”.

This was reflected in Apollo CEO Marc Rowan who recently commented to the effect that Australian superannuation funds have become too exposed to naked equity markets. This has been driven by low-cost investment allocations which can carry increased downside volatility.  

Foreign Fancy 

Last year saw local fund managers attract a record amount of capital from foreign investors as the Australian private market sector becomes increasingly attractive for those investors looking to Australia’s relatively stable environment and to diversify their currency exposure. This, coupled with a reduction in superannuation funds commitments, meant that some local managers had foreign investor capital representing more than half of their fund. “We are hoping that the superannuation funds will return to larger ticket sizes later this year” says License.

 “The larger superannuation funds have been through a number of mergers in the last 18 months and have taken stock of their exposure to all their assets. Now that the dust has settled, we are hoping that the trustees will allocate some of their AUD$3.5 trillion in assets to the private markets.” 

While the uptick in foreign capital is welcomed across the region, the requirements of these investors mean increasingly burdensome obligations are placed on managers to secure these commitments. G+T’s Partner and Chief Innovation Officer Caryn Sandler highlighted that “As our client’s obligations towards their investors grow with each fund they raise; we are constantly looking to the market to identify legal tech solutions which would drive efficiencies within their businesses so that they can focus on the investment objectives of their respective funds.” Sandler noted that automated side letter compliance and providing a streamlined onboarding solution for investors was a common point of discussion, and leveraging technology to achieve these goals was well received by both investors and managers alike.

“2024 is set to be another big year for Australian funds across all private capital sectors.” Nathan Cahill concludes. “We’re likely to see some really strong exits and deployment of capital, with even more successful Australian fundraisings in the second half of this year and into 2025. Continuation funds and recycling of assets will continue to play an important role”.