In a Crowded Fundraising Environment, Buyout Funds Are Squeezing Out Growth Equity

Allocators continue to favor managers with whom they’ve worked in the past, making it particularly hard for growth equity funds to raise money.

Illustration by II (Michaela Handrek-Rehle/Bloomberg)

Illustration by II

(Michaela Handrek-Rehle/Bloomberg)

Amid a mixed environment for private equity fundraising, buyout funds are doing just fine.

Large buyout funds accounted for 90 percent of the $257 billion in capital raised in the second quarter, the highest percentage in over five years, according to the latest PE Pulse report from Ernst & Young published Wednesday. In total, private equity firms raised $257 billion in the first half of the year, down 15 percent from the same period in 2021, as investors recalibrated their portfolios amid heightened uncertainty.

Unlike last year, where growth capital funds propelled private equity activity to a record high, larger buyout funds are now dominating fundraising. In 2021, growth funds raised a record $102 billion, up 53 percent from a year before and up 74 percent from the average of the previous five years, according to a January report by EY.

“I think that smaller [and] younger firms will definitely have a lot more competition and will struggle to fundraise,” Jinny Choi, private equity analyst at PicthBook, told II. Choi added that while some big firms like Apollo and Carlyle delayed fundraising earlier this year, they are having less trouble than middle-market PE shops in the current crowded environment. “[The larger PE firms] will still be able to focus on deploying capital, [although] maybe not as aggressively as they have in the last [few] years,” she said.

Broad networks and long-lasting connections are what makes big funds stand out right now. In the most recent PE report by PitchBook, Choi and other analysts noted that many of the nation’s biggest allocators are giving priority to firms that they have worked with before. “This means larger and more-established managers are poised to fare better in their fundraising efforts,” they wrote. Smaller managers, on the other hand, are forced to raise money from new sources, such as family offices or investors based outside the U.S.


Pete Witte, private equity analyst at EY, said that the same trend was seen during the Global Financial Crisis. “It was another period where it was more difficult to be a smaller, less established manager,” he said. “Not that they can’t do successful fundraising, but just to do that, [they] have to have a strong, differentiated strategy and a really compelling value proposition.” In order to survive periods of high volatility, the smaller managers can’t be private equity generalists and should refrain from investing in areas where the large managers are active, he said.

Witte added that investors have developed relationships with a large pool of managers over the years, and they’re now at a point where they’d like to “consolidate” some of those relationships, he explained. “LPs are under-resourced. It’s hard to manage huge portfolios,” he said.

In the months ahead, private equity firms in general will likely have an even harder time raising money from institutional allocators, who are already suffering from overallocation to private equity as their public portfolios shrink. Some allocators have been selling private equity stakes in the secondary market, where the average net asset value was down 6 percent in the first half of the year. “The longer the current gap in pricing persists between public and private equities, the more difficult it could be for firms on the fundraising trail,” the PitchBook report concluded.