Investor allocations are changing: What it means for fund managers

Capital is still flowing into private equity. The question for fund managers is no longer whether investors are allocating capital, but how those allocation decisions are being made.

Our latest research suggests that, while fundraising has become more challenging for many firms, the more significant shift may be in what investors value when assessing opportunities. Increased due diligence, growing emphasis on specialist expertise and greater focus on valuation methodologies all point to a fundraising environment that is becoming more discerning rather than simply more difficult.

For fund managers, this changes the nature of the fundraising conversation. Investment performance remains fundamental, but investors appear to be looking more closely at the expertise, processes and operational infrastructure behind each fund.

A market that remains open

Among 300 senior executives at private equity firms across the U.S. and Europe, whose firms manage a combined $3.511 trillion in assets, 62% said fundraising had become slightly more difficult over the past year. Yet almost a third said it had become easier, while 5% reported no change.

The wider findings make the picture more nuanced still. More than half of respondents said investors were increasing the number of specialist managers they allocate to, while 42% said investors were maintaining relationships with existing managers. Only 5% reported consolidation.

This is not a market in which investors have stopped allocating; it is one in which managers may need to make a more complete case for why capital should flow to them.
 

What is shaping allocation decisions?

Increased due diligence requirements ranked as the most significant barrier to fundraising, followed by regulatory uncertainty, overallocation constraint and LP reallocations away from alternative assets.

These are distinct pressures, but together they show how the basis of investor assessment may be broadening. The question is not only whether a manager can generate returns. Investors also want greater confidence in the specialism behind the strategy, the quality of the information they receive and the processes supporting the fund.

That helps explain why specialist managers appear to be attracting interest even as fundraising becomes more challenging overall. A clearly defined proposition may carry more weight in a market where investors are scrutinising opportunities more closely.
 

Why valuation is moving up the agenda

“One of the clearest findings is the growing importance of valuation methodologies in investor due diligence,” says Richard Hansford, Head of Growth EMEA, Ocorian.

For managers, the significance is not simply that investors care about valuations. It is that they are looking more closely at how valuations are reached, supported and communicated.

Hansford says this “underlines the need for managers to demonstrate robust valuation processes, transparent reporting and specialist operational expertise as they compete for capital.”

What this means for fund managers

The fundraising market is becoming more selective. Capital is still being deployed, existing manager relationships are being maintained, and specialist strategies are attracting allocations. What is changing is how managers are being assessed.

Performance alone may no longer be enough to carry the fundraising case. Managers increasingly need to demonstrate specialist expertise, respond confidently to deeper due diligence and show that their valuation processes can withstand scrutiny.