‘Shadow capital’ from LPs on pace to top $160 bln this year

  • Shadow capital seen at $161 bln in 2015
  • Lower fees for co-investments cited
  • Private equity funds expected to draw in $468 bln

LPs across the global private equity arena will put an estimated $161 billion into co-investments, direct investments and separate accounts this year, according to a study by placement firm Triago. Broken down, separate accounts comprise 40 percent with $64 billion, followed by 35 percent, or $56 billion for co-investments, and 25 percent or $41 billion for direct investments.

The so-called “shadow capital” estimate is more than double the annual average of $63 billion between 2009 and 2014, according to the firm’s quarterly research update.

“These commitments provide managers with lower fees than those on classic funds, or in the instance of direct investment — where investors bypass managers altogether — no fees,” Triago said.

While capital commitments to private equity funds are routinely released by many data providers in the industry, less is known about investments outside of the traditional fund structure.

Triago first included shadow capital estimates in April, followed by a more comprehensive effort to track its growth over the years, according to a spokesman for the firm.

Overall, the share of shadow capital in the total fundraising pie continues to increase. In 2015, the estimated $161 billion committed for shadow capital comprises 26 percent of the total. In 2014, shadow capital accounted for 23 percent of the total, or $127 billion out of $438 billion. Back in 2010, shadow capital drew in $24 billion, or 11 percent of the roughly $231 billion fundraising total, the firm said.

Total private equity fundraising also strong

Total private equity fundraising remains on track for a strong year, with a projected 2015 total of $468 billion, up from an average of $298 billion a year between 2009 and 2014.

If the projection is realized with hard fourth-quarter data, 2015 would rank as the highest annual amount since 2008’s record of $557 billion, Triago said. Another top year was 2007, when $508 billion was raised.

For the nine months ended September 30, $364 billion was raised by classic private equity funds, while $121 billion was committed through co-investment, direct investment and separate accounts, Triago said.

“Measured by the sheer volume of capital earmarked for private equity investment this year, the asset class has never been healthier, or more competitive,” according to Triago’s November 2015 quarterly.

Distributions from private equity realizations continue to drive fundraising. Through the third quarter, GPs paid back $392 billion to their LPs from dividend recapitalizations and the sale of portfolio companies.  That’s ahead of the pace in 2014, which measured $359 billion through the end of the third quarter.  In the first three quarters of the year, GPs returned $138 billion in net cash, compared to $156 billion for all of 2014, Triago said.

Action item: See the Triago Quarterly report here: http://bit.ly/21yYMLN

Shadow capital chart, Triago

Shadow photo courtesy of Shutterstock