Fundraising explodes as LPs crowd into mega-funds – Quarterly Fundraising

  • U.S. GPs collect $212.1 bln through December
  • Strongest year for U.S. fundraising since 2008
  • LPs show increased interest in distressed

A deluge of distributions over the last several years helped power fundraising in 2015 as limited partners built their allocations back up to their targets, setting the stage for another strong year in 2016.

Strong demand powered fundraising to its strongest annual total in seven years. U.S. funds managed to amass $212.1 billion through December 14, according to Buyouts data, up from about $206 billion in 2014.

While 2015’s total will likely fall short of the 2008 peak of $263.6 billion, fundraising has climbed every year after hitting its financial crisis-era nadir of $65.8 billion in 2009.

LPs “have been getting a lot of distributions, and I think in some cases the denominator effect has been working in reverse,” said Scott Reed, head of U.S. private equity at Aberdeen Asset Management, referring to how fresh exits caused many institutions’ private equity allocations to fall below their targets.

Many firms set larger targets in their most recent returns to market. Mega-funds, vehicles targeting $5 billion or more, and mini-megas, funds between $1 billion and $4.99 billion, accounted for more than 70 percent of the total capital raised last year, according to Buyouts data.

GPs have coupled larger funds with shorter intervals of time between fund raises. Christian Kallen of Hamilton Lane noted the average “time frame to the next fund raise is shrinking.” Sources said firms expected to return to market in 2017 are lining up new funds in 2016 to take advantage of the favorable fundraising environment.

“It’s a frustrating time to be an LP when you see GPs rushing back to market to raise new capital, not because they should, but because they can while the window’s still open,” Reed said. “No one wants to be stuck without capital.”

Several firms returned to market only a short time after closing their previous vehicles. Thoma Bravo closed its 11th flagship fund on its $3.65 billion hard cap in May 2014. The firm began pitching Fund XII to LPs in the second half of this year with a $7 billion target.

After closing its flagship fund on $17.6 billion in 2008, Kohlberg Kravis Roberts & Co spent roughly four years deploying the vehicle before marketing its follow-up in 2012. Just two years removed from closing KKR North American Fund XI, the firm recently launched its 12th flagship vehicle with a $10 billion target.

“It’s the frequency with which managers return to market to raise their next fund, and the degree to which their next fund is larger than their predecessor … if history is a guide, that’s a sign of toppy behavior,” Reed said.

Several sources said they expect fundraising for distressed investments to pick up in the next year. Rising interest rates, tighter lending markets and high valuations “are leading LPs to be defensive, so as a result more LPs are looking at more strategies that are deep-value, turnaround and distressed,” said Eric Zoller of Sixpoint Partners, an investment bank that acts as a placement agent for middle-market firms.

LPs also may increasingly turn their gaze to spin-out funds and first-time GPs as a way of forming bonds with next-generation managers. Several pensions, including the Arkansas Teacher Retirement System and the New York City’s Retirement Systems, set allocations for emerging and first-time managers in 2016.

“There’s been a lot of talk about … recapitalizations in the market, and zombie funds, and I think a small number of those funds are going through a re-birthing movement,” Zoller said, adding he’s seen several teams successfully extract themselves from defunct firms.

Of course, predictions of another strong year for fundraising may go unmet if the market takes a turn for the worse. During the crisis, many LPs stopped making new commitments because of liquidity concerns. In a December appearance on Bloomberg Television, noted private market investor Sam Zell predicted “there’s a high probability that we’re looking at a recession in the next 12 months.”

“The economy is closer to falling over than it is to going up,” Zell said.

Photo: Fireworks are seen over the Olympic Park during the opening ceremony of the 2014 Sochi Winter Olympics, February 7, 2014. REUTERS/Marko Djurica