PUBLICATION: Rede Liquidity Index 1H 2024

Welcome to the 13th edition of the Rede Liquidity Index (RLI), looking at institutional investor sentiment towards Private Equity (“PE”) in the first half of 2024. The latest data shows a five-point uptick in LPs’ intention to allocate more capital to Private Equity funds resulting in an overall RLI score of 54 in the first half of the year.

Key findings from the report:

1. Green shoots but too early to call a recovery

   The RLI score 1H 2024 rose by five points to 54, representing a modest but material uptick in LPs’ intention to allocate capital to Private Equity funds. Given the very challenging fundraising conditions seen since 2022, this may hint toward some cautious optimism for an improvement in fundraising momentum – but it is not yet time to call a recovery. Indeed, one year ago we saw the RLI score rally by nine points from its low point of 41. This was an important indicator that the downward trajectory was flattening, but hopes of a rapid rebound were dampened as sentiment and momentum remained muted throughout the year.

2. Confidence in distributions rebounds to two year high

   Liquidity has been top of mind for LPs over the last twelve months. An RLI score of 58 reveals LPs feel far more confident in the outlook for distributions. This score has surged 40 points in the last twelve months and is the highest score since the all-time peak of 2H 21. This shift in sentiment undoubtedly reflects GPs and LPs becoming more creative in achieving liquidity routes while the market waits for the slumbering M&A and IPO environments to wake-up. The RLI score for Distributions has proved itself to be a particularly useful leading indicator for overall fundraising momentum, and we will be keeping a close eye on the development of the Distribution RLI score in coming months. The plateauing in LP sentiment we saw during mid-2023 was arguably driven by continued challenges in exit markets. While we have seen exit newsflow improve significantly over recent months, it appears reasonable to anticipate that a full recovery will not take hold until we see a real acceleration in exit momentum.

3. LPs are actively seeking new relationships, but expect fewer reups with existing managers

   While the RLI for new money commitments has increased by 8 points to 60, the score for existing GP relationships continues to flatline at 45, indicating that LPs’ commitments to new relationships will come at the expense of their existing GPs. We see several distinct explanations for these contrasting results. Firstly, many of the established large-caps completed fundraising last year, so LPs are simply witnessing fewer demands for reups in 2024 than in 2023, leaving more capital available for new relationships. On the other hand, many LPs are experiencing pockets of underperformance within their existing portfolios, driving churn within their GP relationships – a trend that has been further driven by the emphatic return of business travel, conference attendance and a general sense of excitement around newer, more innovative or more relevant GPs.

4. Appetite for America abounds, demand for Europe is growing and Lower-midmarket buyouts remain most in favour

   LP demand for North American-focused GPs continues to rise with the in-bound RLI for North America rising 8 points to 65. Investors in all geographies expressed strong appetite to deploy capital into North American-focused funds seemingly unperturbed by any uncertainty presented by the November elections. Inbound interest in Europe is also growing, an RLI score of 58 LPs indicates an overall intension to expand deployment to funds focused on Europe.

   Each survey highlights particular pockets of increased demand but Lower Mid-Market Buyout Managers have been consistently popular over the last several RLI surveys. We recorded a 7% increase in LPs intending to allocate more capital to lower mid-market buyout managers. This segment is traditionally well positioned to enable portfolio diversification, less exposed to leverage and presents an attractive opportunity for GPs to exert influence and to drive value.

5. The liquidity squeeze has increased appetite and innovation within Secondaries market

   The RLI score for LPs’ intention to allocate to Secondaries funds rose to 59. The slowdown in exits and resultant liquidity squeeze has increased demand and innovation within the Secondaries market as LPs look to release unrealized value. Necessity is the mother of invention and LPs and GPs have both embraced the tools presented by secondaries – from rebalancing portfolio exposure across particular sectors, geographies or vintages to utilising continuation vehicles and strip sales to maximise value.