The Denominator Effect: Accelerating your fundraising plans

There were 45% fewer private equity fund closings in 2022 vs 2021, according to data from S&P Global, and the slow fundraising pace continued through 2023. Alongside record inflation and rising interest rates, a less quoted reason for this decrease is the Denominator Effect.

The Denominator Effect occurs when the value of one portion of an investment portfolio decreases, meaning those other portions make up a larger percentage of the portfolio’s overall value. Most commonly, the Denominator Effect kicks in when public markets fall, causing private asset allocations to increase in percentage terms. For institutional investors, this means they are closer to hitting their private asset allocation limits as they are set out in their limited partnership agreements. With today’s wavering public markets, the Denominator Effect is thereby restricting the ability of pension funds and other institutions to invest new money into private equity.

Any barrier to the flow of capital into the private markets is cause for concern, especially for a business owner looking to raise capital to grow their business to its true potential. However, the impact of the Denominator Effect will not impact your ability to raise funds in the short-term; 2021 was a record year for new fund closings, and investors are still looking to deploy those funds today.

These capital reserves will not last forever, however. Knowing that the Denominator Effect may restrict the raising of future funds, businesses we speak to are in some cases accelerating their fundraising processes, seeking their share of this capital before the Denominator Effect takes hold.