Barnes & Thornburg’s 2023 Investment Funds Outlook Report

It's harder out there.

Double-digit decreases in asset values in most investment classes — combined with rising interest rates and bank failures — have left stakeholders juggling several moving pieces.

So, what does the private investment industry expect in 2023?

Barnes & Thornburg’s inaugural Investment Funds Outlook Report draws on insights from sponsors, investors, and service providers involved with private equity firms, hedge funds, credit institutions, and venture capital firms across a range of industries for a clearer picture on where private funds stand — and what to expect in the year ahead. Fund terms, particularly extensions to investment and fundraising periods, are changing. Limited partners have bolstered their negotiating power as general partners compete for capital allocation — turning up the pressure on general partners in areas like succession planning, fees and expenses, transparency, and ESG investing. Numerous sectors, meanwhile, are managing headwinds, including cryptocurrencies, life sciences, and real estate. Taken together, 2023 is shaping up to be an exciting year for private funds.

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Key Findings From Our First Investment Funds Outlook Survey Report

Investors experiencing the “denominator effect” are increasingly particular about where they direct their money, as slow exits, declining valuations and liquidity restrictions have impacted limited partner (LP) cash flow. It’s no surprise, then, that 75% of respondents expect changes in fund terms that will benefit LPs.

LPs have more leverage — and fund terms are changing as a result.

For instance, 71% of general partners (GPs) expect to show more discipline toward long-term management of funds over the next year, while only 56% of LPs believe the same of GPs.

LPs and GPs have different expectations for 2023 — and for one another.

expect fund term changes benefitting LPs

75%

This issue will only take on more importance amid persistent economic uncertainty, and continued pressure from LPs to ensure key portfolio managers and other team members ensure long-term continuity in investment decisions and protect LP capital.

Succession planning is highly valued by LPs, yet only 41% of GPs have such plans in place.

of GPs do not have a succession plan in place

59%

This should be of particular concern to GPs, since 90% of LPs view ESG implementation as a priority and only half of GPs factor ESG into deal terms some (36%) or half (14%) of the time.

of deals fall through or are interrupted due to ESG concerns

50%

PERCENTAGE POINTS separate the expectations that LPs and GPs have for fund management

What Our Private Funds and Asset Management Attorneys Expect

Partner in Barnes & Thornburg’s Private Funds and Asset Management Group

Catherine Turgeon

Uncertainty in the markets and rising interest rates have made equity financings less attractive to investors, resulting in a drop in the PE activity of many private investment funds. This has also caused many portfolio companies to look to their existing PE investors for follow-on investments, to support the business until a new equity round can be raised on attractive terms

Co-chair of Barnes & Thornburg’s Private Funds and Asset Management Group

Jahan Sharifi

It’s a truism that when you have changing markets, you have more interesting investments. As our current economic uncertainty persists, the more sophisticated, thoughtful, and analytical funds have an opportunity to get out in front. Our hope is that the insights gathered in this report can help them do just that.

Partner in Barnes & Thornburg’s Private Funds and Asset Management Group

Kerry Potter McCormick

GPs, especially less experienced ones, will have to find innovative ways to attract LP dollars and address concerns about ESG and succession planning. At the same time, stakeholders on all sides of the deal table will need to make sure they’re getting the right risk-reward balance, while making preparations to adapt to inevitable shifts in the markets.

Co-chair of Barnes & Thornburg’s Private Funds and Asset Management Group

Scott Beal

Given continued economic uncertainty, we expect that the private funds sector will be rife with new tensions, dynamics, challenges, and opportunities.

In Private Funds and Asset Management, 3 Sectors Show Cautious Optimism

Cryptocurrency is a risk many are still willing to take. Most respondents — particularly private equity and credit managers — say the current state of the cryptocurrency market has significantly impacted their company in a negative way. Yet even as regulatory scrutiny picks up, the majority are still considering or actively deploying capital in the space in 2023. Life sciences has plenty more investment potential. Though investment in life sciences has cooled slightly, more than half of respondents focused in the space see gene therapy, precision medicine, artificial intelligence/machine learning, and cell therapy as key opportunities. Real estate PE funds draw interest despite the softening economy. They may experience difficulties when compared to pre-2022 levels – due, in part, to the shift to work-from-home and real estate capitalization rates – opportunities abound: For instance, roughly the same number of respondents call rising interest rates an opportunity as those who view it as a challenge.

A Closer Look at What Private Fund Managers, GPs and LPs are Thinking

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LPs say that Nearly half of all private fund transactions fall through or are interrupted due to ESG standards not being met from the LP side.

Barnes & Thornburg’s 2023 Investment Funds Outlook Report

The New GP-LP Dynamic: Changing Fund Terms, Emerging Challenges, and Misalignment Abound Succession Planning Takes Center Stage ESG is a Key Priority — at Least for LPs

Life Sciences Funding Comes Down to Earth — But Outlook Remains Positive

Real Estate Private Equity: Proceeding with Caution

Digital Assets: Will Crypto Spring Back?

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Life Sciences Funding Comes Down to Earth — But Outlook Remains Positive

Real Estate Private Equity: Proceeding with Caution

Digital Assets: Will Crypto Spring Back?

Private Investment Funds and Asset Management Outlook The 2023 Barnes & Thornburg Report

Ready for an even deeper dive?

Get the full Barnes & Thornburg Private Funds Outlook Survey

On an earnings call late last year, Blackstone president Jonathan Gray offered a succinct summary of the institutional fundraising climate:

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Barnes & Thornburg’s 2023 Investment Funds Outlook Report