PE Panorama: Betting on assumptions
18 April 2017
Category: News, Asia, Global, USA, Europe
By Paul Mackintosh
Preqin has just released some striking figures on current private equity (PE) fundraising. According to its latest first-quarter analysis, “the strong private equity fundraising activity that characterised much of last year has continued into 2017, as the industry is likely to record its highest 1Q capital total since the global financial crisis (GFC). Globally, 175 private equity funds reached a final close in 1Q2017, raising a combined US$89 billion in investor commitments”.
General partners (GPs) are likely rubbing their hands at the news – or the heads of the lucky-money golden cat statuettes on their desks. And there’s probably even better news – for GPs – on the way. “…Preqin expects these figures to rise by a further 10%… surpassing the $90 billion that was raised by funds closed in 1Q2016 and approaching the all-time high of $105 billion seen in 1Q2008”.
Should we be cheering? After all, that kind of money will surely keep limited partners (LPs), GPs, and industry commentators like Yours Truly paid up for quite some time to come. And yet…
For one thing, that mountain of money is a distinctly unbalanced one. Christopher Elvin, head of PE products at Preqin, cites indications that, “although fundraising remains robust, it is increasingly being centred on a small coterie of large firms raising mega funds, many of which focus on the US”. North American funds accounted “for more than two-thirds of all capital raised in the quarter”, while European vehicles struggled to match 1Q2016 levels of capital accumulation. Expect to see US deals get bid up even higher, even more heavily-levered, even more competitive, and even less likely to deliver stunning returns at exit – unless the targets are flipped to another equally avaricious GP.
Then there’s the little matter of dry powder. “Private equity dry powder continued to climb in 1Q, rising from $821 billion at the end of 2016 to reach $842 billion as at the end of March”, notes Preqin. Mathematicians among you may have noticed that 1Q2017 fundraising has given the industry over 10% more dry powder to choke on. And while it sits around earning the GPs management fees, that new, even bigger pile is going to go… where?
Finally, let’s consider that volume in itself. Can we assume that all that money was raised by coldly calculating LPs, who took a measured and rational decision to commit to the asset class based on its merits, without a smidgeon of investor fashion, gold-rush fever, and other irrational exuberances at work? And do all of those LPs have adequate capabilities to even understand the asset class, let alone invest into it scrupulously and responsibly? Did they factor a saturated market and diminishing returns into their decisions? I can tell you how much I’m willing to bet on those assumptions – and it’s a lot less than $89 billion…