Data provider Preqin’s latest quarterly report indicates the kind of slowdown in private equity that might alarm investors used to the fundraising glut and big-ticket deals of the past couple of years.
Funds raised in the second quarter of 2019 totalled US$109 billion. While that’s not the lowest quarterly figure of recent years, it’s still well down from the dizzy heights of 2016-2017, when the total spiked to $180 billion in the second quarter of 2017. And the value of buyout deals has fallen from some $102 billion in the first three months of 2019 to $75 billion in April through June.
Venture capital deals also pulled back sharply. A year after reaching a record high $77 billion in the second quarter of 2018, it’s down to $52 billion, a level last seen in mid-2017.
Preqin also reports an all-time high of almost 4,000 funds in the market for the quarter, seeking $981 billion in total, despite the slowdown in fundraising.
So how worried should general partners (GPs) and investors be? Well, it depends on expectations. Obviously, deals are going to continue to get done. With private equity dry powder peaking at $1.54 trillion at the end of June, GPs have no choice but to try to invest some of that capital, even if valuations will inevitably be higher, and ultimate returns correspondingly lower.
Limited partners (LPs), meanwhile, should be wary of the new high of would-be funds in a market that they know is already oversaturated with capital. That’s a message that apparently has yet to percolate through to ambitious – and dare one say, greedy? – new teams.
Institutional investors who expect private equity to transform its own fortunes, or theirs, are therefore likely to be disappointed. The median net internal rate of return (IRR) for funds of every vintage year from 2010 onwards has stayed steady at around 15%, according to Preqin’s data. That may be an attractive enough return, but it’s not one that has budged much despite all the feverish fundraising. Yes, the IRR of top-quartile funds from the 2016 vintage onwards peaked at more than 25%, but it would be a lucky LP who can reap those rewards so soon after fund launch.
Is there any sign that the popularity of the asset class, the plethora of new funds, and the record mountain of dry powder waiting for GPs to shovel into deals, has propelled it to some new plateau of activity, momentum, scale and deal size? No. If there is any big ceiling to be broken through in the asset class, it hasn’t been reached yet.
Investors had better not count on any great increase in prospects or performance in private equity in the next few years.