Private Equity’s Woes Bleed Into Other Alternative Investments

When Bobby Jain, a co-CIO at Izzy Englander’s Millennium Management who left the hedge fund in 2023, launched his own eponymous firm this year, he was reportedly expected to raise as much as $10 billion. But when Jain Global began trading in July, the fund had amassed a little more than half that — $5.3 billion.

While the money raised by Jain still remains one of the biggest launches in years, it occurred at a time when hedge funds say the woes of private equity are hurting their fundraising efforts. “The trend is not great for anybody,” says an individual familiar with Jain’s efforts. Moreover, it is happening at a time when hedge fund strategies are shining—and allocator interest is stronger than it has been in years.

The problem is a lack of what Kevin Del Mauro, managing director and the U.S. head of business development at Leucadia Asset Management, calls “liquid capital.” He asserts this phenomenon exists because institutions who have heavily invested in private equity aren’t getting distributions back — cash that they could then plow into hedge funds. Their money is — to put it bluntly — stuck, in private equity funds.

“The biggest hurdle to fundraising today is just how much capital is out there since private equity has not returned capital,” Del Mauro says. Private equity has raised “a ton” of money, he says, but the funds have not been able to close on underlying deals to send distributions back to their investors, who are also on the hook for future capital calls.

The dropoff in available cash is significant, too. “Distributions — or the lack thereof — have been a key topic for asset owners since they began to slow in 2022,” Keith Crouch, executive director of MSCI Research, said in a report on private equity earlier this year. He calculated that private-equity distributions during the first quarter were down almost two-thirds from prior years. This year’s first quarter distributions came to only 8.7 percent of valuations. In contrast, between 2015 through 2019, the distribution rate averaged 23.5 percent, according to MSCI.

Del Mauro argues that the lack of liquid capital is particularly unfortunate because “the choppy markets that we’re seeing right now are actually a very good thing for the hedge fund space. That’s historically where hedge funds make a lot of return.” In its first half 2024 survey of hedge funds, Goldman Sachs found that hedge funds just posted their best half-yearly performance in three years, with an average return of 5.9 percent for the first six months of 2024 that beat “risk assets despite a strong market backdrop.”

But instead of attracting money, hedge funds have seen big redemptions. This year, net outflows from hedge funds reached $39.13 billion during the first six months, on top of $104.8 billion last year, according to eVestment, owned by Nasdaq.

Cliff Asness, cofounder of AQR Capital Management and a prominent critic of private equity, believes the lack of “free dollars” at allocators who are invested in private equity has been hampering AQR’s fundraising efforts recently even though its funds have had a strong comeback in the past four years.

While clients haven’t said the lack of distributions is the cause, “it’s implicit,” he says. “We’ve generally not had a lot of redemptions since we’ve been coming back, but we haven’t had huge inflows either, and we’ve done really well, and I think a lot of that is the money is currently locked up in privates. I think our clients are very happy, but people don’t have a lot of free dollars.”

It’s not just that the hedge funds are hampered in raising capital, however. “You’ve seen redemptions in the hedge fund space, not because of performance,” says Del Mauro. He explains that the hedge fund’s investors needed to raise cash to finance capital calls from the private equity funds they are also invested in. “The only thing they could do was take it from high performing hedge fund strategies,” says Del Mauro.

The calls for capital are significant now because private equity fundraising peaked in 2021, and these newly raised funds need to tap their investors, according to MSCI.

For hedge funds that means “there’s not a lot of money right now to be put to work, even if you’re underwriting new strategies,” says Luke Rodino, the prior head of business development at RPD Fund Management. Before leaving the firm this summer he told II “We have a lot of investors who are interested in what we do who are putting off allocations.”

The interest is clearly there, according to the Goldman report. It found that “the net proportion of allocators looking to increase their exposure to hedge funds has reached the highest level on our records, with hedge funds leading the way as the most popular asset class overall for the first time since the first half of 2020.” During the second quarter of this year, 41 percent of allocators surveyed by Goldman said they planned to increase their exposure to hedge funds, compared with only 28 percent who wanted to increase their exposure to private equity (including venture capital and growth equity).

But it’s not always easy to do so. The allocations to hedge funds have to “line up with what they believe to be the receipt of cash,” says Rodino, who is now a director at HighVista Strategies. “But there haven’t been very many exits.” He says that allocators are starting to realize that “yes, a five-, seven- and 10-year lockup is great when you’re getting distributions, and valuations are going up. But when you really need liquidity or you’re in somewhat of a liquidity crunch, that’s where hedge funds can be much more dynamic and much more interesting.”