Q3: U.S. PE fundraising ramps up for possible post-crisis record

U.S. private equity firms are within shouting distance of the $196.7 billion they raised last year, setting the stage for a possible record annual fundraising haul for the post-global-financial-crisis era.

Preliminary Buyouts data suggests PE firms had raised $174 billion through late September, with massive flagship funds raised by firms like Apollo Global Management, Clayton Dubilier & Rice, Silver Lake and Vista Equity Partners accounting for more than a third of the total raised.

In the third quarter, New Mountain Capital added more than $6.1 billion to the total when it held a final close on its fifth fund, coming in well above its $5 billion target. Bain Capital’s 12th North American fund beat its $7 billion target to hold a final close on $9.4 billion. Through late September, U.S. firms had raised $38.3 billion in Q3.

Technology-focused funds have been particularly popular among LPs this year, and the Silver Lake and Vista Equity funds, which closed at $15 billion and $11 billion respectively, represented most of the $30.7 billion raised for that sector, according to Buyouts data.

“We’re on pace to raise a record amount, but I don’t think it’ll be a blowout amount,” said Peter Martenson of Eaton Partners. “We’re not seeing overexuberance. Maybe people have a long memory.”

Indeed — many large LPs still hold significant exposure to disappointing pre-recession vintage funds, which dragged down overall returns for the next decade. More than half California Public Employees’ Retirement System’s $26.4 billion private equity portfolio was allocated to funds raised between 2006 and 2008 as of November, according to pension documents. CalPERS, which has been concentrating its private equity holdings among fewer firms over the past several years, inked just four new commitments totaling $2.1 billion so far in 2017.

Another major LP, University of Texas Investment Management Co, recently halted the expansion of its PE program, which had been underway for the better part of the previous decade, Bloomberg reported. The endowment’s CEO, Britt Harris, cited higher valuations and liquidity concerns as chief among his reasons for hitting pause.

Not every LP is hitting the brakes, however. Rhode Island State Investment Commission is planning to commit as much as $265 million a year through the next five years to roughly double its allocation to the asset class. Los Angeles County Employees Retirement Association committed roughly $390 million across three funds in August, bringing its total for the year north of $1 billion.

Despite concern about high prices, those LPs may have good reason to increase their exposure. General partners have generally approached the current deal environment with greater caution than they did in the years leading up to the crisis, multiple sources told Buyouts.

“What you don’t have, on paper, is the huge amounts of leverage,” one LP told Buyouts. “People have been more disciplined heading into this.”

Purchase-price multiples in late 2016 and early 2017 drifted into expensive territory, hovering between 9x and 10x, a September report by StepStone Group shows. But debt multiples on large buyout loans have remained relatively flat, averaging out at 5.7x EBITDA.

Underpinning all the above is the notion that the next few years could yield an economic downturn. LP commitments tend to dry up in hard times, which has led some firms to come back to market sooner than expected.

Some of those firms, like Apollo, hold off on activating their new vehicles by holding a “dry close” on new vehicles. Apollo won’t begin investing its new fund until early 2018, four to six months after it announced a final close, Chairman and CEO Leon Black said during a Q3 earnings call.

“Guys are maybe coming back six months before when you’d expect,” one LP told Buyouts. “And I get it. If I were a GP I’d do the same thing.”

U.S. bills are counted on March 10, 2016. Reuters/Amr Abdallah Dalsh

 

Additional Data

Amount raised through Q3 2017 by fund type ($B)

FUNDS RAISED IN Q3 2017

Largest fundraisers in 2017 YTD

LBO funds raised by target size through Q3 2017 ($B)

Q3 2017 Playbook for Select LPs

Quarterly breakdown of amount raised by U.S.- based buyout and mezzanine firms ($B)

U.S. buyout and mezzanine fundraising ($B)