A new report from Seward & Kissel focused on seed investments in hedge funds, private equity funds, and other investment vehicles, shows that transactions are returning to pre-pandemic levels, even in the face of challenging market conditions.
The ninth annual Seward & Kissel Seed Transactions Deal Points Study, an analysis of 2022 seed investments reveals “surprising resilience” in seed activity, which approached 2019 levels last year despite headwinds in the broader economy including rising interest rates and the underwater status of many investment portfolios.
The report attributes the uptick in seeding activity to one primary source: the increased seeding of traditional private equity funds and other illiquid or “closed-end” fund structures. Seward & Kissel says that interest in less-liquid investment products have been on the rise in recent years, accounting for a growing share of seed activity. The report notes that based on current trends, it “would not be surprising” if private equity seeding ultimately equaled or even exceeded the hedge fund category, which for the time being still accounts for most seed deals.
Some deal points for seed investments, which give new funds and managers a foundation to attract additional investors, remained consistent with past years despite the economic uncertainty in 2022. The market-standard “lock-up” period –which limits seed investors’ ability to redeem capital and allows managers to orient their decisions toward the long-term– remained at a two- to three-year term.
The study also suggests an increase in both “manager-friendly” and “third-party investor-friendly” structures for seed deals. Seed investors showed a willingness to bear some start-up costs for managers and subject themselves to liquidity restrictions imposed on other investors after their lock-up period. However, the study also shows that seed investors sought protections to manage risks of market downturns and volatility, often negotiating performance-related lock-up release triggers.
