10^th Annual Study Also Shows Strong Alignment with Fund Managers and Third-Party Investors as a Key Feature of Deal Structure

Seed investments in hedge funds, private equity funds, private credit funds, and other investment vehicles continued to generate significant deal volume in 2023, according to the tenth annual Seward & Kissel Seed Transactions Deal Points Study. Conducted by the leading law firm to the private funds industry, the study confirms continued momentum for seeding of “closed-end” (illiquid) fund structures in particular—including private credit funds and traditional private equity. The full study is available here.

While overall observed seeding activity remained steady year-over-year, in 2023, seed investments were nearly as likely to be made in illiquid or less-liquid strategies as in liquid products (such as hedge funds). This changing proportion continues a trend observed in 2022 and remains notable considering the historical overweighting of seeding to hedge fund managers.

According to the study, deal terms continue to trend towards greater alignment between seeders, managers, and third-party investors, as seeders increasingly agree to structures that are relatively friendly to fund managers and non-seed investors. Examples include seeders’ agreement both to bear some start-up costs of a new fund and to remain subject to a liquidity profile mirroring that of third-party investors—even in the case of an early termination of a hard lock-up period, where seeders have historically sought accelerated liquidity. Managers have also gained increased breathing room through the rise of three-year lock-ups, which were featured in half of 2023 seeding deals, up from just 10% in 2018.

Additionally, more than three-quarters of observed deals in 2023 included working capital support, a new milestone in what has been a pattern of growth over several years. In 2022, the proportion was 64%, up from 59% in 2021 and 48% in 2018. Assistance with working capital is a critical enabler for new managers in an environment where major allocators increasingly will not consider an investment into a new fund unless institutional-level capabilities and infrastructure are in place.

Other key findings of the Seward & Kissel Seed Transactions Deal Points Study include:

• Institutional seeders continued to represent an outsized share of observed seed transactions, driving a significant increase in the observed median check size.
• Geopolitical turmoil—and a relatively unfavorable macroeconomic and fiscal policy backdrop—continued to challenge new funds and managers, but these factors seem not to have restrained the level of seed transactions appreciably.
• Traditional long/short equity strategies, particularly those focused on defined industries or themes, again attracted a significant portion of aggregate seed investment dollars. Among liquid strategies, multi-strategy managers were especially popular.
• Mindful of the volatility experienced in 2020, seed investors continued to push hard for protections in the form of narrower performance-related early lock-up release triggers.

Commentary

Seward & Kissel Business Transactions Group partner Gary Anderson, the lead author of the Seward & Kissel Seed Transactions Deal Points Study:

“Seed deals are still most prevalent in the hedge fund category, but extrapolating from recent trends, private equity/private credit seeding is well on its way to catching up. In fact, I would not be surprised to see closed-end fund seeding exceed hedge fund seeding in the coming years.”

“The ongoing trend towards greater alignment of seeders with managers and third-party investors is an excellent sign for the continued growth of seed transactions. For example, recent SEC guidance and focus makes it increasingly imperative to match the seeder’s liquidity profile to that of other investors in the fund.”

Gary Anderson is available to speak to the media about the Seward & Kissel Seed Transactions Deal Points Study.

About Seward & Kissel LLP

Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. The firm is particularly well known for its hedge fund and investment management work, having established the first hedge fund ever, A.W. Jones, in 1949, and having earned numerous best in class awards over the years. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.

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