PE industry welcomes a revival of fortune

By Paul Mackintosh - 28/04/14

In its latest Private Equity Spotlight, research firm Preqin has some interesting reflections on the situation in fundraising. For one thing, private equity fundraising overall continues the recovery it has enjoyed over the past couple of years, with every sign that limited partners (LPs) are rewarding the asset class’s strong recent showing in deals, exits, and realisations with new commitments of capital. Overall fund closing for the full year of 2013 hit US$454 billion according to Preqin’s figures, the highest figure since 2008’s $595 billion, and ahead of all years except that one and 2007. Compare this to 2010’s $255 billion and it is easy to see how far the asset class’s fortunes have revived.

However, the picture is not looking anything like so good for first-time funds. Preqin observes a decline in the capital closed by first-time vehicles from a recent peak of $56 billion in 2011 to just $35 billion in 2013. So obviously that resurgent sentiment among LPs is favouring established managers at the expense of emerging managers.

This is an interesting turnaround from what used to be accepted thinking among seasoned private equity (PE) investors about how to get the best performance out of fund commitments. The perceived wisdom used to be that new vehicles could deliver the best returns with dynamic, determined managers, even if the total capital volume was not yet so substantial. Also, early investors would have privileged access to later rounds once the managers had won their spurs.

The figures are looking rather different now. According to Preqin: “Forty-seven percent of first-time funds closed in Q1 2014 failed to meet their target size, compared to 28% of funds raised by experienced fund managers”. And more worrying perhaps, “during 2013, 64 private equity funds that were aiming to raise $34 billion were abandoned; 57% of these funds were being raised by first-time fund managers, up from 48% of abandoned funds in 2012”. That said, “as of April 2014, 2,116 private equity funds are currently in the market, 641 of which are first-time funds that are seeking to raise $141 billion”, so clearly hope springs eternal. All the same, if the actual volume of first-time fund closes matches that in 2013, only one quarter of that aggregate target is likely to be met in 2014.

Reports in the market for some time have indicated that LPs are seeking to reduce their number of commitments and focus on the most lucrative key managers. Perhaps this is part of the reason for the trend against first-timers. A growing institutionalisation of the asset class and greater power for LPs is welcome in some respects – but maybe not so much for the new and eager entrants.