PE Firms Start Cutting Deals to Attract Investors

Private equity firms need to compete on everything from fees to co-investments to raise funds in the current market environment, says Passthrough’s co-founder Tim Flannery.

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Illustration by II

With investors sitting on the sidelines, private equity firms are doing what they can to attract capital, including offering fee concessions and using artificial intelligence in the fundraising process.

According to a survey by Passthrough, whose products help PE firms onboard investors, 37 percent of private equity professionals believe the current fundraising environment is “extremely challenging,” while 43 percent said that it’s “somewhat challenging.”

In a June survey of 101 U.S.-based private equity professionals, including fund managers, chief investment officers, chief financial officers, and investor relations directors, 51 percent of private equity professionals (51 percent) said they’re likely to offer more favorable terms to investors in such an environment.

“It’s definitely a buyer’s market,” said Tim Flannery, CEO and co-founder of Passthrough. “There are more people offering concessions on whatever it might be. Funds that were previously inaccessible to new investors…all of a sudden you don’t need to find access to them in the secondary market.” He added that PE firms now “have to compete on terms” to attract investors, which can include providing special fee arrangements and co-investment opportunities, items that are often disclosed in side letters.

According to the report, nearly 80 percent of survey respondents said that they’re facing increased liquidity pressure from investors. Forty-six percent of the surveyed PE professionals said that they’re having more difficulty securing returning investors, and 45 percent said that they’re facing longer fundraising time lines.

As raising capital from institutions becomes more challenging, PE firms have begun reaching out to a broader range of investors and geographies, according to the report. Fifty-one percent of respondents said that they expect more participation from international investors, and 49 percent expect an increase in capital from retail investors.

The survey also found that PE firms have been using artificial intelligence tools to assist in the fundraising process. Fifty-three percent of survey respondents said that they’re using AI tools for data-driven analytics, while 51 percent said they’re using the tools for operational due diligence. Forty-nine percent of PE firms are using AI tools for personal outreach, while 46 percent are using them to generate customized pitches to investors.

“It was a surprising finding to me,” Flannery said. “I’ve seen [AI adoption] on the investment side, but I haven’t seen it as much on the fundraising side.”

“They’re using every tool in their tool kit today to find out how to find investors and how to convince them to invest in their funds,” he said.

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