Institutional investors and other limited partners are getting impatient to get their money back from private equity funds.
And as they get crankier about their current investments in private equity funds, they have become less willing to write new checks to fund managers. Relations between many general partners and their limited-partner investors have become fraught.
“Recent years have seen one of the most challenging fundraising cycles for private equity this century,” said LeapFrog’s Andy Kuper, who last month closed on its Fund IV at $808 million, shy of its $1 billion target.
Fundraising for impact funds has certainly been caught in the downdraft. Pangea Ventures, for example, announced an $85 million final close of its second climate tech fund in September, after initially targeting $100 million.
But there are some bright spots for impact funds targeting institutional investors. Institutional appetite for impact and sustainability-themed investing appears to remain robust, particularly for climate.
Some are shifting their impact investing and sustainable strategies to other asset classes and markets in order to find liquidity and returns amid the continuing struggle within private equity.
The California Public Employees’ Retirement System, for example, has set a target to invest $100 billion into climate solutions by 2030 – and is already more than halfway there. The New York State Common Retirement Fund last year increased its investment target for climate solutions to $40 billion by 2035, doubling the goal it had set in 2019. And the UK public pension pool Border To Coast added £1.2 billion to the £1.4 billion budget for climate solutions investments it had set in 2022.
And some smaller and emerging fund managers are having success even as larger funds struggle, as investors are on the hunt for new managers.
“An overwhelming 86% of LPs plan on making a first commitment to a new manager relationship in any of the strategies in the next one to two years,” Coller Capital reported in a survey late last year. “This proactive stance highlights LPs’ efforts to diversify and explore opportunities across the spectrum of alternative investment strategies.”
In a survey of institutional impact investors that typically take LP positions, placement agent Rede Partners found that 61% had increased their allocations to sustainability/impact themes in the past two years. The survey’s accompanying report, dated October 2024, says “our panel of LPs have, on average, seen a 37% increase in the capital they have available to invest in sustainability/impact.”
Impact allocations “are bucking overall trends within private markets fundraising,” notes Rede. The most common driver of increasing sustainability allocations, it said, “is investor conviction in the attractiveness of the risk/return opportunity presented by the asset class,” as mentioned by more than a quarter of LPs.
Significantly, many allocations to impact and climate fund managers are coming not from dedicated mandates, but from generalist investors. Rede found that of 176 individual LP commitments closed into impact funds over the past 18 months, nearly three-quarters came from ‘generalist’ investors, representing 62% of the capital raised.
That may indicate that impact funds are becoming attractive to investors on a purely financial basis. But it comes with a caveat: impact funds are now competing with impact-agnostic funds for a slice of an LP’s generalist private equity portfolio.
Dry January
Last year ended on an optimistic note for private equity fundraisers. That has since given way to a more sobering reality, as the anticipated catalysts for busy and efficient investment activity now appear less certain.
As the new austerity trickles down, this spells a bleak prospect for impact private equity funds, which will likely face longer fundraising timelines and postponed timelines for deploying their capital and striking impactful deals.
At the turn of the year, predictions of lower interest rates sparking renewed M&A and IPO activity created high expectations for 2025. The mood in private equity circles has noticeably deflated since then.
The macroeconomic conditions of the past year are unlikely to ease as rapidly as hoped: the US’s Federal Reserve, after having implemented several benchmark interest cuts last fall, has said it will not be so quick to cut rates in the new year. Inflation has come down in the US, but remains sticky in many markets, buoyed by high energy bills and food prices through the winter. In the Eurozone, for example, inflation rose in December to 2.4%. Liquidity and M&A outlooks across Asia remain largely subdued as a result of the persistent lack of growth in China.
Liquidity through M&A and IPO activity is critical to fundraising: institutional investors need distributions from their existing private equity fund investments in order to free up capital to commit to new funds. The last two years in private equity have been characterised by limited distributions and liquidity.
“Given the tight liquidity environment, the vast majority of respondents have received fundraising extension requests from their GPs in the past 12 months,” secondaries firm Coller Capital reports in its 2024-2025 Global Private Equity Barometer, which surveyed institutional investors. Coller specializes in secondaries, a substrategy within private equity that provides mechanisms for early liquidity for LPs and GPs, which gives it a vantage point for LP sentiments.
The last two years in private equity have been characterised by limited distributions and liquidity. High interest rates and scarcity of capital have meant many private equity-backed companies have faced lower valuations and have taken longer to reach revenue and growth targets. Many private equity fund managers have had to mark down their assets in order to achieve exits. And in many cases, their private equity sponsors have opted to hold onto these companies for longer to wait out the macroeconomic conditions.
Past financial performance nevertheless remains critical to institutional investors’ commitment decisions. They are increasingly impatient — and they are not quick to forgive GPs that underperformed in recent years due to the macroeconomic conditions.
“Operating in a negative cash flow environment has become a familiar experience for LPs,” Coller writes in its Barometer. “Perhaps it is not a surprise that nearly 80% of respondents have declined the opportunity to reinvest with one or more of their current managers in the last 12 months.” For respondents that have declined re-ups, the most common motivation was performance related, accounting for 42% of declines, Coller’s survey shows.
Private equity professionals had hoped 2025 would bring a surge of M&A and IPO activity, facilitating distributions for LPs. It still might. But, with a two-year backlog, the exit environment is highly congested, putting downward pressure on valuations and deal volume.
Impact across asset classes
As the tight liquidity environment persists, investors are showing a clear preference for lower risk, shorter-term and more liquid strategies within private markets, says Anna Morrison, managing director and head of private equity research at investment consultancy Bfinance.
Such strategies include such as fixed income, IG debt and corporate lending, which provide lower returns but also lower risk and regular yields; and secondaries, which provide faster distributions than primary private equity strategies. Infrastructure, which often serves as a hedge against inflation, is also likely to generate significant investor interest as inflation remains sticky but uncertain in the coming year.
Although institutional investors typically have set allocations and limited flexibility for each asset class within their total portfolio, impact allocations by such investors often cut across asset classes.
The New York State Common Retirement Fund’s $40 billion target, for example, can be invested in private equity, debt, infrastructure or green bonds. Impact GPs therefore may find more success with private debt and infrastructure impact strategies and green bonds.
Indeed, many prominent impact fund managers have already anticipated this direction of investor sentiment and launched climate infrastructure funds.
TPG’s impact platform, Rise, launched its debut Rise Climate Infrastructure fund last year, for example; it has a $6 billion fundraising target. KKR launched its first Global Climate Infrastructure Fund in 2023 (target $6 billion), forgoing the impact label, after closing its second impact private equity fund in 2023 at $2.8 billion. Just yesterday, private equity advisory giant Stepstone announced the close of its debut infrastructure fund, which focuses on energy transition, digital connectivity and AI.
Fundraising challenges for impact private equity funds are likely to persist this year — and many such funds remain in market. TPG is still raising Rise Climate II; Eurazeo is in the market with its debut climate-focused Planetary Boundaries fund; Bain Capital is still raising its third Double Impact fund. Impact GPs will find themselves among the last in the breadline for private equity allocations, says Bfinance’s Morrison.
With impact investing still a relatively recent movement in the institutional market, impact funds remain a niche strategy, she says. They are competing with GPs marketing traditional private equity strategies that are perhaps “on their 10th vintages” and therefore have stronger and longer track records.
Investors will typically start with broadly-diversified buyout funds when experimenting with a new niche or specialism such as impact, says Morrison, “because the returns are more stable, there is lower risk and the growth is clearer” at the buyout stage. But investors are hampered by the limited opportunity set for buyout impact funds — there are only a handful of such funds, and even fewer with established track records.
So how can a PE impact fund manager raise capital?
“The financials have to come first,” Sarita Gosrani, Bfinance’s director of ESG and responsible investment, told ImpactAlpha: GPs should focus their marketing on their investment strategy rather than their impact. For institutional investors, “impact first just doesn’t work.”
She advises GPs to showcase their private equity investment track records and the skillsets within their teams. “Focus on sector-specific skills, and that doesn’t mean impact outcomes,” Gosrani adds. For example, a healthcare impact fund should prioritize demonstrating healthcare investing experience, even if that investing experience is not explicitly impact-focused.
The fundraising prospects for impact funds seeking commercial capital this year remain uncertain, and sentiment continues to shift with the seasons. But as institutional investors remain committed to supporting climate opportunities and the energy transition, new strategies in alternatives will continue to flower.
