Introduction
While the headwinds from the COVID-19 pandemic began to fade in 2022, new challenges emerged in the broader economy as Federal Reserve policies increased interest rates and cheap money withdrew from the system. Many of the industries and asset classes that had outperformed during the prior cycle returned to earth, and correspondingly many investment portfolios went underwater. Despite these challenges, overall seeding activity in 2022 was surprisingly strong (approaching 2019 levels, based on our dataset). The considerable majority of seeding activity was focused on hedge funds and other liquid strategies – consistent with all prior years in our dataset – but the main source of the observed uptick was the increase in the seeding of less-liquid investment products, particularly the seeding of private credit strategies and other closed-end investment vehicles. Unlike past years, seeding of “hybrid” and other partially liquid strategies – whose mandates include positions in illiquid private companies – was down somewhat, presumably a lagging indicator of the broader pullback in the technology and life science industries.
The remaining effects of the COVID-19 pandemic combined with the broader economic slowdown in 2022 created unique challenges for new funds and managers. However, those who were able to obtain a seed investment had a considerable head start for their businesses and a springboard to attract additional investors. The persistence of two to three-year (and longer) lock-ups as the market standard incentivized seeded managers to invest greater resources in their businesses and orient their decisions – both investment and operational – with an eye towards the long-term.
Key observations:
- Continued emphasis on alignment between seeders and seeded managers, as well as seeders and other limited partners in the seeded funds, was observed in most seeding activity
- Long/short equity strategies (particularly with a defined industry or thematic focus) remained a significant portion of overall seeding activity
- The popularity of hybrid structures was somewhat diminished versus prior years
- Closed-end fund structures, such as private credit, private equity or venture capital, represented a growing share of observed activity
For more information about the current state of seeding, or seed transactions generally, contact your primary attorney at Seward & Kissel.
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