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For private equity fund managers, there is at least one area of life that is moving in the opposite direction: fundraising.
Today, raising capital for a new closed-ended fund is a slog.
McKinsey data shows that private equity funds that closed in 2024 spent an average of 21.9 months raising capital, compared to 19.6 months in 2023 and 14.1 months in 2018.
The trend is clear.
Longer fundraises, lower fees
All this extra time on the road is time that funds are not collecting management fees. That adds up to a lot of lost money.
According to Preqin, buyout funds with a 2024 vintage had an average management fee of 1.74%. That accounts for the concessions managers have offered to certain high-value investors.
Using McKinsey’s numbers, that means a typical $1 billion private equity fund is missing out on more than $11 million in management fees compared to what it would have collected in 2018. This, of course, assumes only a single close, so the number is likely a little smaller.
Either way, it will be several million dollars; a huge cost to incur due to spending an additional eight months on the road.
Management fees have fallen, on average, as competition for investor dollars increases.
This means the average fund on the road in 2018 had a double advantage: they started collecting management fees earlier and likely received a higher management fee.
Surviving without an income isn’t easy
This lost fee income is money that managers rely on to cover the fund’s operating expenses. Management fees are a fund’s only guaranteed source of income. They cover salaries, rents and other overheads.
Any delays to that money coming in are especially problematic for new managers who don’t have management fees from other funds to keep them going. Longer fundraises mean more travel, more flights and more legal fees. These costs add up quickly when there is no money coming in to pay for them.
There is no reliable data showing how many funds fail during the fundraising process, but we do know that the number of funds closing each year is falling. In 2024, 3,000 private asset funds closed, a 28% decline compared to before the pandemic, according to Bain.
Longer fundraising periods also have implications for funds that have already closed and deployed their capital.
When managers spend longer on the road raising money for a new fund, that is time they are not spending time with their portfolio companies or finding other ways to generate returns for investors.
Is this trend likely to continue?
We believe fundraising periods will continue to lengthen in the immediate future.
Why do we think that?
One reason is the self-perpetuating nature of the problem. Longer fundraising periods mean more funds in the market at any given time. That increases competition for every investor dollar, further extending the time it takes to hit the target.
The pressures that caused the trend in the first place are still with us. The big managers continue to gain market share. The rest of the market will have to keep working harder to be noticed.
GPs should therefore apply every ethical technique to secure an advantage with investors. That means being interesting. It means being memorable.
LPs will read up on managers before they meet them. In the sea of information out there, managers need to make sure their online presence is professional, their messaging is tailored to their ideal investors and their key selling points are truly distinct and compelling.
Managers offering this are in a strong position to secure allocations quicker than their rivals.
Managers can do a lot to improve their chances with investors.
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