With private equity new fund commitments slowing, investors are priortising key strategies and sectors into 2023, according to the H2 Rede Liquidity Index (RLI).
- Mid-market and lower mid-market private equity in focus, according to Rede’s Liquidity Index
- Investor demand remains for healthcare, but fewer specialists here than other sectors
- North America and enterprise software represent bright spots for tech-based fundraising
With private equity new fund commitments slowing, investors are priortising key strategies and sectors into 2023, according to the H2 Rede Liquidity Index (RLI).
Two thirds of LPs report that their private markets portfolios are currently sitting at the middle or lower end of their target allocation, and a third of the LPs surveyed are planning to increase exposure to lower mid-market buyouts over the next year with 31% favouring mid-market buyouts.
LPs see this type of investment as the best way to protect against ongoing market disruption, says Rede, with GPs able to exit greater operational influence over smaller acquisitions.
Meanwhile, LP appetite for minority strategies such as growth equity and venture capital has slipped, with only 14% of LPs planning to increase commitments to growth funds, a fall of 13% since the H1 2022 edition of the RLI. Similarly, the proportion of investors planning to add more VC exposure has fallen from 22% in the first half of the year to 15%.
A strong appetite among LPs for healthcare investments continues, with 30% of investors planning to increase allocations to healthcare-focused funds, but there are far fewer dedicated healthcare-focused GPs than there are GPs focused on other sectors such as technology. As a result, Rede expects quality, healthcare-focused GPs to achieve strong fundraising results over the coming months, bucking the trend of a generally tougher fundraising market.
Second to healthcare, 21% of LPs intend to increase exposure to sustainability and impact funds. With mitigating climate change increasingly seen as a mainstream concern, and the conflict in Ukraine highlighting the vulnerabilities of economic dependence on imported fossil fuels, Rede says LPs clearly have a growing appetite to invest “behind the decarbonisation megatrend”.
The result is that sustainability and impact funds have leapfrogged technology funds for the first time, with only 17% of LPs indicating that they plan to increase exposure to tech funds in 2023, down 16% from the H1 survey. However, given the huge growth in LP deployment to technology over recent years, Rede says this could be seen as a levelling out of demand, rather than a broader move away from the tech sector.
Many technology funds, especially those focused on the enterprise software segment, are still posting impressive performance, and even with fewer LPs actively seeking to expand their tech portfolio, Rede believes the sector is still likely to represent a “healthy proportion” of successful fundraises in 2023. LPs located in North America remain particularly committed to the sector, with 29% there saying they are planning to increase their exposure to tech funds in 2023.
Key takeaway | Healthcare and technology private equity funds remain popular for investors, but each subject to changing sector dynamics
