As we reported in “Worry Sign: Major Investors Holding Onto Cash” (8 Aug 2023), foundations, pension funds, and the other major investors who fund private equity’s deals have been sitting on their cash, waiting for a more encouraging economic outlook.
Private equity firms need that cash to make deals and pay a return to their existing investors, so the firms are offering enticements to bring in new money.
Some firms are offering discounts on management fees or even forgiving them; some offer larger slices of deals for no additional cost, people familiar told the Financial Times.
“Almost every firm in our suite of clients is contemplating, or has employed, some form of incentive for investors to put capital in as quickly as possible and in as large as possible,” Sunaina Sinha, chief of private capital at Raymond James, said in an FT interview.
“There isn’t so much overt discounting but there is secret discounting,” Gabrielle Joseph, head of client development at private equity advisory firm Rede Partners, said to the FT.
In the first six months of 2023, private equity funds worldwide raised $517 billion, 35 percent below the total from the same period a year earlier, a Bain & Co. analysis found.
According to Bain, for every $3 private equity is trying to coax from investors, those investors have allocated only $1 to private equity, the largest gap since the Great Recession.
TREND FORECAST: Again, it’s simple math. The higher U.S. interest rates the safer the bet to invest in money markets and treasuries that are paying 5 percent plus on investments. When U.S. interest rates dramatically drop, which they will again at some point to boost a dying economy, the investor circuit will re-ignite.