The Carry - Issue #02 - Fundraising Freeze? PSG didn't get the memo

Welcome to this week’s edition of The Carry - the weekly newsletter taking the important stuff from mid-market PE and making it not boring to read.

Estimated Read Time: 7 minutes

Investment Theme of the Week: PSG Equity’s $8 billion fundraise

Overview:

PSG Equity made a splash this week by closing an $8 billion fund in this year’s (so far) brutal fundraising market.

With interest rates up, LPs tightening their wallets, and (mild?) panic about exits, many firms are struggling to get checks signed. But not PSG, apparently.

The group closed on two new funds:

• $6B for PSG VI: Their latest North American flagship fund, up from $4.7B in the last round.

• $2B for PSG Sequel: A continuation fund that they’ll use to hold onto six portfolio companies. Notable investors in this fund include the Canada Pension Plan Investment Board and Singapore's GIC.

And just like that, PSG’s AUM jumped a whopping 40% to $28B.

How’d they pull it off?:

PSG has one of the best track records in the growth equity space. And they recently narrowed their focus on software companies doing $10-50M in revenue. Their approach in these deals is to aggressively scale companies through add-on acquisitions (aka the “buy-and-build” model).

But their real cheat code? You guessed it: AI.

PSG is playing 4D chess went it comes to deal sourcing. They built an AI-powered sourcing engine that scans over 600,000 companies to find potential targets. Forget waiting on deal flow from bankers. They’re getting in early on attractive deals before they even hit the mainstream M&A market.

And their approach gave LPs ($8 billion worth of) confidence in an environment where other firms are struggling to close anything.

Why it matters for the middle-market:

• Tech is still getting funded - but it’s not a free-for-all: blank checks from LPs might be a thing of the past. But investors will still back firms with a clear edge (like PSG’s deal-sourcing machine)

• Continuation funds are still in the mix: their $2B Sequel fund lets PSG hold onto some of their winners instead of having to sell in a weak exit market. It’ll be interesting to see if other firms copy this strategy.

• Growth equity is evolving: firms can still be successful betting on early-stage tech. But it’ll depend on whether they can scale efficiently. They won’t be able to rely on sky-high valuations in this market.

Final take:

While fundraising right now feels harder than getting a dinner reservation at Carbone, PSG just closed on $8B. Which says a lot about LPs’ confidence in their approach.

Now let’s see how long it takes before every firm has its own AI deal sourcing engine.

Market Moves: Notable mid-market deals this week

1️⃣ Teledyne Acquires Units from Excelitas for $710 Million

• The Move: Teledyne Technologies finalized on its deal to acquire certain aerospace and defense electronics businesses from Excelitas Technologies, backed by AEA Investors, for $710 million in cash.

• The Strategy: The acquisition includes U.K.-based Qioptiq, which supplies advanced optics, and a U.S.-based business specializing in custom energetics and electronic devices for defense and space.

• The Insight: This points to continued consolidation in the aerospace and defense sectors. And shows PE firms are capitalizing on strategic divestitures.

Weekly Scoreboard: Key middle-market metrics

1️⃣ Last year’s fundraising activity data: In 2024, private equity funds worldwide closed on $680.04 billion, down 30% from the previous year.

2️⃣ 2024 Exit-to-investment ratio: 2024 wrapped up with a record-low exit-to-investment ratio of 0.36x. Bad news for exits.

The Exit

That’s a wrap for this week! We’re already working on some new content types that we’re excited to roll out over the coming weeks. Be on the lookout for those.

Also, let us know what you thought of the first issue! What did you like? How can we get better? Look forward to hearing from you and see you next week!

📢 Disclaimer: The Carry is for informational and educational purposes only and should not be considered financial, investment, legal, or tax advice. Nothing in this newsletter constitutes an offer, recommendation, or solicitation to buy or sell any financial assets. Private equity investing is complex and involves significant risk.

Always do your own research and consult with qualified financial professionals before making any investment decisions. The Carry and its authors assume no liability for financial or investment outcomes based on the information provided.