- U.S. fundraising at $174 bln through mid-December
- Funds targeting $1 bln or more comprise more than half total raised
- Advent, Leonard Green lead buyout firms for largest fund raised
U.S. private equity funds raised roughly $174 billion through mid-December, indicating the industry is off pace to match the $228 billion raised in 2015, Buyouts data shows.
Fundraising volumes climbed in each of the previous five years, and the 2015 total was the most since 2008. The $174 billion figure will rise as more general partners report final closes, and U.S. GPs are likely to finish the year with around $200 billion of fresh capital raised.
Hitting $200 billion would likely require closes from several larger firms marketing flagship funds, including Goldman Sachs’s buyout unit, West Street Capital Partners, and enterprise-software specialist Vista Equity Partners.
Vista through July had circled $8.5 billion toward its $10 billion hard cap, an Oct. 5 memo from the Connecticut treasurer’s office shows. Goldman, targeting $5 billion to $8 billion, is expected to hold an interim close in 2016.
While fundraising likely slipped or remained steady in 2016, the industry’s ability or willingness to raise additional capital tells only part of the story. As of Sept. 30, data provider Preqin pegged global private equity dry powder at a record $839 billion (which doesn’t include capital pledged to real estate or infrastructure funds).
Furthermore, limited partners are putting more and more capital to work as co-investments, a market overview by Hamilton Lane shows. The firm estimates that $375 billion to $450 billion of co-investments were executed in the U.S. from 2007 to 2015. In the first half, PE deals representing almost $103 billion of transaction volume included some direct participation from LPs, a recent report from Pitchbook said.
“I actually don’t think that fundraising in one given year is a great barometer,” said Brian Gildea, a managing director at Hamilton Lane. “The timing of the fundraises from the GPs really is what moves the needle. Literally 30 percent of the capital raised last year came from the top 20 funds. And the bigs are getting bigger.”
Gildea’s assertion corresponds with Buyouts data. Megafunds like the one Vista raised, dominated U.S. fundraising in 2016. Funds targeting $5 billion or more collected $48.5 billion through mid-December, according to Buyouts data. Advent International ($13 billion), Leonard Green ($9.6 billion) and Ares Management ($7.85 billion) raised the three largest PE funds this year, Buyouts data shows.
Large funds or mini-megas — which target $1 billion to $4.99 billion — collected $45.7 billion. Another $35.8 billion went to U.S. funds targeting less than $1 billion. Roughly a quarter of the capital raised went to funds with no stated target.
“When you look at what happened in 2015-2016, the market has been dominated by large buyout funds,” AlpInvest’s Peter Cornelius told Buyouts. “It’s a trend we have been observing since the global financial crisis, the flight to brand names and quality. Which explains why some managers haven’t had much difficulty in raising larger funds, some considerably larger funds, in short amounts of time.”
The relative success of larger fundraises is influencing data in other ways. Three years ago, PE firms needed an average of 19.3 months to raise a new fund, according to Preqin. As of Q3 2016, more than half of funds in market were spending less than 18 months on the road.
On Dec. 15, HGGC closed its third flagship fund on $1.84 billion after less than 100 days of marketing. Warburg Pincus had similar good fortune with its first dedicated China fund, announcing a final close on $2 billion in December after just six months.
The PE firms able to close quickly likely benefited from the impressive stream of distributions the asset class delivered over the previous half-decade. As private equity firms returned cash from their fund investments, investors redeployed those returns in the form of re-ups with their strongest GPs. This spurred higher fund targets and faster fund closes between 2012 and 2016.
Distributions started to slow at many major institutions this year, including public pensions like California Public Employees’ Retirement System and Teachers’ Retirement System of Louisiana. The trend has yet to affect other LPs, however.
“We’ve seen a pretty steady pipeline over the last couple of years,” said LP Brian Rodde of Makena Capital. “Our managers have been delivering considerably more in distributions than they’ve asked of us in contributions or capital calls.”
The colors of fall are reflected in a waterfall along the Blackberry River in Canaan, Connecticut, on Oct. 13, 2004. Photo courtesy Reuters/Jessica Rinaldi