Hedge funds are facing fundraising challenges as private equity struggles to return money to institutional investors like pension plans, foundations, and endowments. Institutional investors are rebuffing hedge funds due to a slowdown in distributions from private equity funds. Michael Monforth, global head of capital advisory at JPMorgan Chase, explained that the reduced distributions from private equity, private debt, and venture funds are causing allocators to pause new investments into illiquid and more liquid hedge funds.
According to Bain & Co’s annual private equity report, buyout-backed exits fell to $345 billion last year, the lowest in a decade. This has resulted in a record backlog of 28,000 companies worth over $3 trillion. The thin IPO market and held-back M&A activity have made it challenging for private equity to distribute funds.
Hedge funds and private equity managers often compete for allocations from institutional investors’ alternatives bucket, which includes private credit, infrastructure, and real estate. Sunaina Sinha Haldea, head of private capital advisory at Raymond James, emphasized that the lack of distributions in private markets impacts new commitments across the alternatives portfolio, including hedge funds.
The global private capital industry reached $14.5 trillion in assets last year, tripling from a decade earlier. However, hedge fund inflows have been muted, with net withdrawals in five of the past ten years, according to Hedge Fund Research. The constrained capital environment is affecting new hedge fund launches.