The LP Wish List
An LP survey from law firm Barnes & Thornburg shows that investors are interested in AI applications and succession planning at their private fund managers
Despite high hopes that this year would be an active one for M&A, 2024 has so far continued to be slow in terms of dealmaking, fundraising and exits.
A survey of private market fund LPs from law firm Barnes & Thornburg shows that investors are more interested in innovative strategies like secondaries, cryptocurrency and private credit. Many are also focusing on their GPs’ use of artificial intelligence and succession planning, two items that private fund managers have scored low on so far.
“Fundraising, dealmaking, and exit values all saw steep declines in 2023 as high interest rates and economic volatility continued to quash exit opportunities—leaving both limited partners (LPs) and general partners (GPs) on the hunt for liquidity,” the report said.
The survey showed that GPs continue to struggle with fundraising and extended investment periods, succession planning is more important to LPs than a year ago, and credit-focused respondents are concerned about workouts and restructuring. Many LPs also said they want the funds they invest in to use AI for investment analysis and decision-making.
Almost 40% of both GPs and LPs said they saw increases in expenses over the past 12 months—double the number of last year’s response. Higher costs and a slow dealmaking environment could be preventing GPs from making significant strides in succession or AI. The market environment is also a reason for LPs to consider private credit, crypto funds or secondaries for better returns or liquidity.
Passing on the Reins
Barnes & Thornburg’s questionnaire found that succession planning was very important to LPs and that most GPs don’t have a plan in place. The survey, conducted in April, showed that a whopping 96% of LPs believe it’s important for the funds they invest in to have a succession plan, up from 66% last year. At the same time, only 38% of GPs have a plan, with 31% working on one, 16% considering doing so and 15% not even considering it. GPs with an existing plan referenced cost savings, governance priorities, disruption avoidance and talent management as key reasons for their thinking. “Only 20% attributed their actions to pressure from LPs, suggesting that some LPs may not be making their voices heard on this issue,” the report said.
The paper cited several reasons for GPs’ lack of preparedness in this area, including few other smooth transitions to use as models, consolidation that could solve the succession issue in a different way and high costs. “The market hasn’t seen many high-profile examples of seamless leadership transitions, which could be one reason why many GPs don’t have a plan in place,” the report said. “What’s more, the rise in fund consolidation could be a response to this quandary. After all, selling off a fund to another manager could be an effective business opportunity and a way to avoid some of the issues that arise during succession,” the lawyers wrote.
“With GPs reluctant to dismantle legacy funds and beset by cost pressures, it should perhaps come as little surprise that the group made less headway on succession plans this year than last,” the paper continued.
Burgeoning AI Use
AI has been the talk of the town in the past two years as new products and companies keep launching. Of the LPs polled, 77% said they are encouraging the funds they invest in to use AI and machine learning for investment analysis and decision making. This is another area where GP activity doesn’t match up with LP expectations. Of the GPs polled, 26% said they implemented AI for at least one function, about half (46%) are in the process of implementing at least one function, 16% are considering it, and 12% are not considering any AI functions at all. The most popular use cases among GPs for AI so far were market data analysis, compliance and target identification.
“AI is all the rage in 2024—and investment funds are just as bullish on the technology as other businesses,” the report said. Three-quarters of respondents agreed there will be more AI unicorns over the next year than any other startup type combined. Venture capital investors are the most active and outspoken supporters of AI, with Andreessen Horowitz aggressively investing in the sector from its recently raised $7.2 billion fund.
AI is all the rage in 2024—and investment funds are just as bullish on the technology as other businesses.
2024 Investment Funds Outlook Report
Barnes & Thornburg’s Private Funds and Asset Management Practice
Looking ahead at the next two years, 36% of respondents said generative AI will likely make a significant impact on fund performance, with 29% answering that it’s already making an impact, 28% who said they were unsure if it would make an impact or not, and 7% who said it would be unlikely to make an impact.
The Search for Yield
In a lackluster M&A environment, some investors are searching elsewhere for returns. Eighty-four percent of respondents said private investment in cryptocurrency will increase in the next 12 months, for example, with 54% adding that they are more likely to invest in crypto funds than they were in the previous year. Almost 60% of respondents also expect the number of dedicated crypto funds to increase over the next 12 months.
The rise of private credit is also expected to continue, though some investors are wary of the potential for more defaults if market conditions worsen. “Tight lending conditions and high interest rates have fueled demand for private credit, with Blackstone projecting the industry will exceed $3.5 trillion by 2028,” the report said.
At the same time, investors are cautious about restructurings. “Though the sector is expected to keep gaining momentum in the year to come, defaults could also rise should interest rates remain high,” the report said. Over the next six months, 44% of respondents said workouts and restructuring in their private credit portfolios is expected to increase, 49% said it would stay the same, and 7% said it would decrease.
As investors search for liquidity, the secondaries market is growing as a way for LPs to offload private equity stakes. Barnes & Thornburg’s respondents agreed that the secondaries market would be stronger next year, with 34% saying it would be “significantly or moderately” stronger and 41% saying it would be “slightly” stronger.
The market environment is also creating more concentration and consolidation, with LPs placing more money with large brand-name managers. “Fundraising concentration [last year] reached its highest level in over a decade,” according to McKinsey, with the 25 most successful fundraisers collecting 41% of aggregate commitments to closed-end funds.
The survey polled 138 respondents, 40% of whom were sponsors, 37% were service providers, 22% were LPs and 1% described themselves as “other.”
Anastasia Donde is Middle Market Growth’s senior editor.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
