Causeway Equity Partners: A Strategic Bet on the Fundraising Troubles of Small Private Equity Firms

Richard Lichter, a veteran of private equity and founder of Newbury Partners, has launched Causeway Equity Partners, a Miami-based firm focused on a niche but increasingly relevant strategy in the private equity (PE) ecosystem: supporting smaller PE funds struggling to meet their fundraising targets.¹ Against the backdrop of a sluggish fundraising environment, this initiative aims to address a critical gap while leveraging a potentially lucrative investment model—seasoned primaries.

The Opportunity: Seasoned Primaries as a Hedge in Fundraising Slumps

Seasoned primary investments involve committing capital to funds that have already begun deploying their initial investments but are yet to meet their fundraising goals. This strategy offers distinct advantages over traditional blind-pool commitments:

1. Reduced Risk: Causeway invests after gaining visibility into the portfolio’s initial performance, effectively "seeing what they buy."¹

2. Accelerated Returns: Because these funds are closer to the end of their investment periods, they generate distributions to investors faster. Causeway’s vehicles have a shorter, two-year investment period, compared to the conventional four-to-five years typical in PE.²

Lichter argues this approach, especially during today’s constrained liquidity environment, offers not only downside protection but also the potential for superior returns.³ Causeway targets returns exceeding two times invested capital, net of fees, making this model appealing to yield-seeking institutional investors.³

The Fundraising Environment: Challenges for Smaller Firms

Global private equity fundraising has slowed significantly, with capital raised through September 2024 at just $951 billion, trailing 2023’s pace and far below the $1.77 trillion peak in 2021.³ The 18.6-month average fundraising duration for private-capital funds in 2024 is the longest since at least 2008, reflecting a persistent drag in liquidity across the sector.³

Smaller PE funds—those managing less than $1 billion—have been particularly hard hit.³ Limited partners (LPs), facing liquidity constraints and preferring to allocate capital to larger, more established managers, have left smaller firms struggling to close funds. This trend has contributed to a dramatic drop in the number of funds closed annually, from 1,500 in 2021 to 390 in 2024.³

However, Causeway’s focus on smaller funds in the sub-$1 billion range positions it as a critical partner for these firms.¹ By helping them meet their targets, Causeway aligns its strategy with a segment of the market poised for outsized growth, provided the liquidity constraints eventually ease.¹

Market Dynamics Favoring Seasoned Primaries

Several macroeconomic and industry-specific trends underscore the attractiveness of Causeway’s strategy:

• Low Liquidity Among LPs: Distributions from PE funds have declined in tandem with lower exit activity. In the U.S., PE exits totaled $272 billion through September 2024, far below the 2021 peak of $836 billion.³ Limited distributions mean LPs have less to reinvest, heightening competition for available capital.

• Increased IPO Activity: After a period of historic lows, IPO exits have shown signs of revival. Through Q3 2024, there were 156 IPO exits, matching the total for 2023.³ Improved public valuations, with the S&P 500’s forward P/E ratio above its 30-year average, suggest IPOs could reclaim their role as a critical exit mechanism, unlocking much-needed liquidity.³

• Shift in Investor Preferences: According to a survey by Gen II, 40% of asset managers expect increased investor allocations to PE in 2025, reflecting a more optimistic long-term outlook.³ However, LPs remain highly selective, favoring funds with shorter return horizons—a key feature of Causeway’s model.³

A Lean and Targeted Approach

Causeway aims to raise $300 million in its inaugural fund, with a concentrated focus on smaller managers.¹ By limiting its investment period to two years, Causeway ensures a faster return of capital to its LPs, setting it apart from traditional PE models that require longer holding periods.¹

Additionally, Causeway benefits from a seasoned leadership team. Alongside Lichter, the firm’s partner, Alex Maloney, brings expertise from Verition Fund Management, further enhancing its operational and strategic capabilities.¹

Industry Implications and Broader Trends

Causeway Equity Partners is not just a tactical response to current market inefficiencies; it reflects broader shifts in private equity fundraising and strategy:

• Resilience of Small and Mid-Market Funds: Despite liquidity challenges, smaller funds are increasingly being recognized for their agility and potential for higher returns.³ Investors with a higher risk tolerance may find these funds attractive, especially when supported by experienced partners like Causeway.

• Evolving Exit Strategies: With IPOs regaining momentum and corporate acquisitions picking up, PE firms could see improved liquidity prospects, aiding distributions and, ultimately, fundraising.³

Conclusion

Richard Lichter’s launch of Causeway Equity Partners is a timely and interesting response to private equity’s fundraising challenges. By focusing on seasoned primaries and targeting smaller funds, Causeway offers a differentiated approach that aligns with LPs’ current needs for faster returns and lower risk.

For investors, Causeway’s model provides a compelling opportunity to navigate a complex market environment while positioning for outsized gains as liquidity improves. As the PE industry inches toward recovery, strategies like these may well become the cornerstone of a more resilient and adaptive private equity landscape.

Meme Roundup:

Quick Hits:

• US regulator warned banks on crypto but did not order halt to business

• As Biden nears exit, US bans medical debt from credit reports

• Social-Media Companies Decide Content Moderation Is Trending Down
  

Follow Us:

𝕏: https://x.com/BuysideJournal

_{1. WSJ, Private-Equity Veteran Launches New Venture to Fill Fundraising Shortfall, 2024.}

_{2. WSJ, Fundraising Uncertainty Hangs Over Private Equity’s Hopes for 2025, 2024.}

_{3. Deloitte Insights, Private Equity Liquidity Challenges and Fundraising Strategies, 2024.}

_{The content herein is solely for informational purposes and should not be viewed as investment or any other advice or a current or past recommendation, or an offer to sell or the solicitation to buy securities or adopt any investment strategy. Certain of this material has been generated by an artificial intelligence language model, ChatGPT, which has been prompted to provide topical finance-related articles. The articles herein may not reflect the most current news, events, or developments. While we strive for accuracy, there may be limitations, inaccuracies, or biases present, and The Buyside Journal (including, for the avoidance of doubt, its affiliates) assumes no liability for the content herein and does not guarantee the accuracy, adequacy or completeness of such information (and does not undertake any duty to correct or update such information). Readers are encouraged to independently verify the information herein and consult with professionals for specific advice or information. Predictions, opinions, and other information contained herein are subject to change continually and without notice of any kind and to the extent accurate initially may no longer be true after the date indicated. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements.}