LPs want their liquidity and they want it now

GPs still haven't gotten the memo, yet, apparently

• an anecdote from the world of cap-intro

• no, you’re not hallucinating, fundraising has *never* been this hard, but the other shoe has not yet dropped

• what LPs would really prefer

• startups have changed gotten the memo (and changed their burned rates accordingly)

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LPs want their liquidity and they want it now

I was talking to a friend of mine who does cap-intro and fundraising at a large commercial bank, on behalf of PE clients.

He confirmed that it’s a tough market out there for raising capital, but the most interesting thing is that PE managers do not appear to have gotten the memo (or at least, cannot allow themselves to get the memo).

The nature of his fundraising mandates follow a pretty typical pattern: the PE manager is either raising a new fund, or upsizing a preexisting position, and turns to existing LPs and says “who wants in?” (just like they’ve done in the past). Except this time around, the LPs are responding along the lines of “definitely not us,” or more politely, “we’d love to, but we still haven’t seen any money back from funds I-IV, so we’re going to have to pass on Fund V.”

And then the PE managers turn to my friend for help.

And the striking thing is that every time they do this, the managers appear surprised that their existing LPs are giving them the heave-ho. Difficult fundraises are supposed to be other managers’ problems, not mine.

GPs are raising $3 for every $1 there is to allocate

Anyways, I take no joy in it, but it sure seems like the other shoe has not fully dropped.

In this case, the other shoe being the “extinction event” or, at least, the full realization of industry contraction for the Finance Bros.

To wit, I found this chart on fundraising rather striking:

Bain

PE funds are attempting to raise more than 3x the amount of capital that allocators are intending to allocate.

That 3.1:1 ratio of target capital to actual capital is higher than its ever been, and even higher than the post-GFC lean years of 2011-12.

In other words, there are going to be a lot of disappointed managers—they’re raising money because that’s their business (and it’s unclear what other options they have), but there simply isn’t money to be raised. They haven’t gotten the memo, yet.¹

Fake it til you make it, I guess.

Just sell already

Or generate more liquidity, if they can.

Random Walk has written at-length and variously about the lack of exit liquidity in private capital markets. The problem is almost certainly not a lack of willing buyers, but rather a lack of willing sellers, i.e. funds have sold what they can, but what they continue to hold, just isn’t worth their entry price . . . so they continue to hold, presumably because that beats selling at a loss.

The IPO market is wide open, but the private marks are too damn high.

On that front, this too was interesting from the Bain report.

LPs were asked what their preferred paths to liquidity would entail, and the answers will amaze you:

An overwhelmingly large share of LPs said their preferred path to liquidity was a traditional exit, even at a discount.

As for the other liquidity tricks in the bag, LPs generally viewed them as “not preferred.” Only a third selected dividend recaps, a fifth said secondaries, and perhaps most strikingly, only 17% said “nah, let the winners run.”

The point is that while GPs would very much prefer not to sell at a loss, their LPs would very much prefer the opposite. Indeed, the reason for not-selling that GPs would most like to hear (and is the one they often claim to hear), i.e. “let the winners run,” was selected by a mere 17% of respondents(!).

I mean, you could blame the relative complexity and/or risk involved in dividend recaps and/or secondaries for why those strategies are disfavored, but there’s really no mistaking the unfavorability of “just keep holding,”: the LPs want their liquidity, and they want it now.

Now there’s a principal-agent problem, if I’ve ever seen one.

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Other interesting reads

• US Shoppers ditch Temu and Shein. Loophole gone, means the discounts are gone, means the customers are gone.

• Gumloop's quest to create a $1B startup with 10 people. Doing more with less, AI-style.

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Previously, on Random Walk

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1. You know who has gotten the memo that capital is tight? Startups:

SVB

Post-raise burn-rate increases for startups have basically disappeared, whereas historically startups increase their burn rates massively once they put fresh money in the till.

Rather than “jet fuel” to be spent liberally on ‘hypergrowth’ in anticipation of a future raise, fresh capital is now being preserved as runway—post-raise burn rates barely budge. It’s a sea change in startup operating.