US growth equity funds, a category of private equity that invests in high-growth companies without seeking controlling stakes, have recorded their strongest-ever first-half fundraising total, marking a robust recovery from the 2023 fundraising slump. Data from consultancy Preqin shows growth funds attracted $33.2 billion in the first six months of this year, the highest level ever recorded for that period and a substantial 36% increase year-on-year. During the same timeframe, fundraising across other private equity strategies rose by 20%.

Despite the significant surge in capital raised, the number of growth funds conducting fundraising fell to 87 in the first half, down from 96 in the same period last year. Capital is flowing predominantly towards larger, established managers, though smaller specialist funds are also benefiting. Driving factors include heightened investor interest in AI-related companies, alongside valuations that remain below the peaks seen during the 2021 industry boom fueled by the pandemic-era tech surge.

Wingman Growth Partners, headquartered in Connecticut, closed a $215 million growth fund in June. Managing Partner Jeff Marchin commented: "I think the recovery is real, but it's structurally differentiated." US growth equity fundraising peaked in 2021 with $67 billion raised for the year. The monetary and fiscal stimulus during the pandemic sparked a tech investment boom, inflating company valuations at a time when revenue growth was often prioritized over profitability. However, as investors grew increasingly skeptical about whether rapidly expanding companies could ultimately deliver profits justifying their valuations, they retreated from the growth equity space, causing fundraising in the sector to plummet to just $29 billion in 2023.

Hugh MacArthur, chairman of Bain & Company's global private equity business, noted: "The whole asset class got punished. The investor attitude was essentially: 'stop, I don't know what everyone is doing, so I'm not going to invest.'" The decline in IPOs and subdued deal activity reduced exit options for private investments, limiting distributions back to investors and weakening their capacity to commit capital to new funds.

However, growth equity fundraising has now recovered for two consecutive years and is expected to continue growing. A McKinsey survey of 296 institutional investors conducted in January found that 46% of respondents plan to increase their allocation to growth equity over the next three years. In comparison, 35% plan to increase buyout fund allocations and 41% plan to increase venture capital allocations.

Guidepost Growth Equity, based in Boston, closed its latest $521 million fund in January. General Partner Chris Kavanagh noted that private company valuations "have come down materially" compared to 2021, allowing investors to "enter at more attractive valuation multiples." Investors indicate that the remarkable success of AI startups has also enhanced the appeal of growth equity. Pension funds and endowments seek to position themselves in companies they believe could become the next generation of tech leaders. Luke Riela of Meketa, which advises institutional investors on private market investments, stated: "Allocators have a stronger need to capture the next OpenAI, Anthropic, or SpaceX in their portfolios and not miss out."

Despite the positive momentum, investors remain cautious when selecting funds, with the majority of capital flowing into a small number of large funds that are better equipped to handle substantial institutional commitments. In the first half of this year, three growth funds—including the roughly $10 billion Thrive X fund managed by Joshua Kushner's Thrive Capital—accounted for over half of all fundraising totals. An executive at a state pension plan who participated in several large growth funds this year said of the big funds: "This isn't where you get the highest returns; it's more of a 'I can safely deploy $500 million here' option."

Smaller specialist growth funds have also achieved fundraising success. Sheldon Lewis, managing partner at San Diego-based Blueprint Equity, said his fund focused on AI-driven early-stage software companies successfully raised $333 million, building on strong returns from prior funds. Lewis remarked: "When you go back to existing investors for a new fund and you've already returned meaningful cash to them, they're naturally more willing to commit again."

Despite the improving industry trends, many growth funds still face difficult fundraising conditions. Exit channels remain constrained, while the traditional software sector—historically a core focus for growth equity—is being disrupted by rapid AI developments. Sara Sandstrom of financial advisory firm Campbell Lutyens, who leads North American private equity placement activities, noted that growth funds established in 2022 have yet to return significant cash to investors. Funds from 2021 have returned only about $0.60 for every $1 invested, well below industry standards. She commented: "The last wave of growth investing hasn't delivered convincing returns overall."

Bruce McDonald, chief investment officer of Virginia Commonwealth University's investment management company, which oversees $2.5 billion in assets, said he has avoided traditional growth funds. He explained that such funds are "highly dependent on the software sector, where investment risks are high."