Fundraising and Investment Strategies: Key trends for 2024-2025

ABOUT THE AUTHORS:

Isabel Rodríguez is the head of the investment funds team at Addleshaw Goddard’s Madrid office. Isabel is vice-president of the legal and regulatory committee of Invest Europe, member of the board of directors of the Private Equity and Venture Capital Institute and the secretary of the board of directors of the International Women’s Forum Spain.

María de Orueta is a Counsel in the funds team at Addleshaw Goddard’s Madrid office. She advises on the structuring and establishment of domestic and international investment funds (private equity, venture capital, infrastructure, debt funds, funds of funds), the creation of investment management companies and secondary transactions.

Key Points

• There is increasing interest in launching new projects related to sustainable and impact investment.

• Many investors are reinvesting in successor funds they have previously invested in.

• Spanish managers are offering tailored deal structures to attract new investors.

• European and Spanish markets benefit from public programs that help managers secure commitments and enhance investor bases.

• There has been an increase in interest in GP-led secondary transactions and continuation vehicles.

• Interest in energy and infrastructure funds, especially renewables, has increased in 2023 and 2024 due to European sustainability regulations.

Despite the challenging macroeconomic conditions that continue to affect European markets, including still-high inflation, and considering that the number and volume of private equity investments fell by more than 34% in 2023, compared to 2022, the private equity sector remains very attractive.

There are a significant number of new projects for the authorization and incorporation of regulated managers willing to enter the private equity business and the creation of innovative projects, mainly focused on sustainable or impact investments. The recent increase in interest from private banks and family offices in this type of asset in Spain, as well as the various public investment incentive programs that exist, have served as motivation for the launch of many of these new projects.

Furthermore, a number of well-established managers who would otherwise have started marketing their vintage funds last year, but who decided to remain cautious and patient as they saw their competitors in this field experiencing great difficulties (with longer closing times and fundraising significantly lower than expected), view 2024 as an interesting year to launch such funds, and are also exploring new fund strategies, such as secondary transactions and single asset opportunity funds.

Consolidating the existing investor base

Given the general reduction in capital allocations that certain investors have faced in recent years, many have chosen to maintain existing sector allocations by reinvesting in successor funds to those in which they have previously invested and which have a satisfactory track record, favorable past performance and deal and operating teams that they are familiar with.

By offering these investors the opportunity to participate in first closings, with corresponding management fee or carried interest discounts and other favorable investment terms (such as priority over co-investment opportunities), management companies have been able to build on existing investor relationships.

Targeting a new network

In order to mitigate the lack of investment from certain recurring investors (who in some cases may not be able to reinvest in a successor fund, or may have to reduce their allocation due to a reduction in asset sales by the private equity funds in which they invest, ultimately resulting in these investors receiving fewer distributions), managers are exploring various alternatives to complement their existing investor base. The following solutions are also often chosen by first-time managers with no proven track record or existing investor base.

Despite challenging macroeconomic conditions, the private equity sector remains very attractive.

The use of global placement agents and investor consultants is becoming increasingly important, particularly for accessing international institutional investors, pension plans and family offices (such as in those jurisdictions where a regulated agent is required to handle such marketing activities). In this respect, US pension and other institutional funds and Middle Eastern and Asian sovereign wealth funds are showing great interest in finding investment opportunities in Europe – and that includes Spain.

On the other hand, within the local market, Spanish managers are offering investors the use of deal structures tailored to specific investor needs in order to attract new investors, most notably from high-net-worth individuals, family offices, and financial institutions' managed accounts and aggregator vehicles, whose interest in investing in private equity has grown significantly in recent years.

Promotion of the public sector

The European market, and Spain in particular, benefits from access to a wide range of public programs that are being availed of by managers seeking to secure substantial commitments and enhance their private investor base. In addition to the European programs, public bodies in Spain such as the Official Credit Institute (ICO) of the Ministry of Economy have been (and continue to be) key players since the arrival of private capital in Spain, allowing numerous management companies to take their first steps and, once established, consolidate their business.

Implementation of new investment strategies

There has been a significant increase in interest in GP-led secondary transactions and continuation vehicles, driven by the desire to maximize value from nominated portfolio companies, which typically require a longer holding period and additional capital commitment for certain assets.

Such interest is typically shared between investment managers and multiple investors seeking exposure to high quality existing portfolios and investments. It is also common for some investors to focus on pursuing co-investment opportunities to increase their exposure to higher quality assets, while often benefiting from reduced fees and carried-interest arrangements.

Established managers view 2024 as an opportune year to launch vintage funds.

In addition, some investors have shown significant interest in other deal-specific arrangements, such as single-asset opportunity funds, which allow for greater investor influence and control over investment policy. Although potentially offering less financial upside for managers, these mandates can provide additional revenue streams and help develop relationships with investors during periods of fundraising for a flagship strategy where existing funds have not yet been fully deployed or there has been a significant divestment, or when considering the launch of a new investment strategy.

Exploration of new investment focus

At the same time, faced with a higher-interest-rate environment and tighter bank-lending conditions for companies, credit fund strategies have continued to grow in popularity in 2024, and credit and direct lending funds in Europe are seeing great interest from investors seeking reliable returns. This growth is accompanied by the introduction and development of European long-term investment funds (ELTIFs), which aim to finance the real economy by channeling non-bank capital into long-term infrastructure projects and the financing of small and medium-sized enterprises.

On the other hand, the sectors of greatest interest in Spain are mainly those related to impact and sustainable investments, which promote and integrate environmental and/or social characteristics. Similarly, in 2023 and 2024 there has been a notable increase in interest in the energy and infrastructure funds market, particularly funds focused on renewable energy. This trend is generally due to the development of European sustainability regulations, which have encouraged both national and international managers and investors to implement new practices and investment strategies.

Looking to the future

For late 2024 and early 2025, assuming there is an increase in the number of deals, which could lead to additional investor demand for new capital, the picture will not change significantly. Managers will focus on adapting to the challenging fundraising environment by strengthening their relationships with existing investors, but also by exploring new investor bases (hiring placement agents to market internationally or engaging private banking distributors) and offering more customized and deal-specific opportunities.

Spain remains well positioned and competitive, with its private funds market showing strong signs of growth.

With its private-funds market showing strong signs of growth and the potential to attract more capital, including international capital, Spain remains well positioned and competitive overall, offering value-opportunities in a wide range of reputable sectors and across a variety of strategies.