Big PE Funds Are Killing It, So Are Small Funds Dead?

September 28, 2017


As large private equity funds take a bigger share of fundraising, successful small and mid-sized funds increasingly turn to specialization and digital tools.

Palico

PE Fundraising Records are Being Broken in Quick Succession

Private equity fundraising is on pace to bring in a record $561 billion across all regions and strategies in 2017. Yet ironically, fundraising for small and mid-sized vehicles, traditionally the beating heart of the market, is difficult. A historically disproportionate share of capital is going to large funds, very large funds indeed. This year we’ve seen Apollo raise the largest buyout fund ever at $24.7 billion and KKR gather $13.9 billion for the biggest ever North American private equity pool. Silver Lake raised $15 billion, briefly an unprecedented sum for a technology-focused vehicle, only to be surpassed by SoftBank’s $93 billion Vision Fund, not only the largest tech pool, but also the biggest private equity fund ever raised – an amazing four times the size of the previous record holder (the Apollo fund mentioned above). Private equity fundraising records are being quickly achieved only to be quickly broken.

The Silver Lining for Small and Mid-Sized Funds

While investor predilection for bigger private equity funds is making fundraising more challenging for smaller and midsized managers, it does have a silver lining for them. Larger and larger funds competing against each other for assets are likely to have a tougher time producing the kind of outsize returns for which PE, historically characterized by smaller funds and inefficiency, is justly celebrated. In today’s environment smaller and mid-sized funds are already recognized as a source of alpha. The conviction that smaller and midsized funds are more likely to deliver outperformance should only grow as big funds grow bigger.

Specialization and Focus is Improving Small & Mid-Sized Appeal

Smaller and midsized funds must do everything possible to reinforce the idea that they can improve returns for investors by adding a layer of alpha onto the beta that big funds provide. This imperative is leading to the founding of many new private equity funds focused on less crowded niche strategies (real assets, credit, even intellectual property). It’s also led older fund groups to narrow their focus to sectors and strategies where they can demonstrate a clear edge.

Dominance of Large Fund Groups Makes Digital Tools an Essential Leveler

A fundraising marketplace increasingly dominated by larger and ever-better capitalized fund groups means that in addition to exploiting specialized investment niches, it’s become essential for smaller and midsized managers to find new ways to get their message heard. Use of social media and online fundraising marketplaces like Palico is rising rapidly; smaller and mid-sized managers who neglect these digital means of brand building and fundraising increasingly do so at their own peril.

Palico Democratizes Private Equity Investment

Although it fits seamlessly with traditional means of raising capital, Palico is a disruptor that’s altering private equity fundraising and secondary sales. In today’s more diverse private equity universe, primaries, secondaries and co-investments – anywhere in the world – are easy to find using Palico’s online marketplace. Palico offers LPs and GPs more opportunity to discover, analyze and invest.

"With Palico, it’s not just the biggest fund groups that can easily reach the world with a fundraising campaign."

Thibaut de Chassey, Elaïs Capital