The market for new private equity funds remains strong going into 2019, with more than $209 billion raised by buyout and mezzanine funds in the past year.
Despite an active Q4, which saw $73.2 billion in fundraising, 2018 didn’t match the highs of 2017, when buyouts and mezzanine funds raised $241.6 billion. Still, LP demand remained high and experts don’t expect that to change anytime soon.
“Overall, it was a very strong year for fundraising, and one of the things that stood out to me was the resiliency of the fundraising market,” said Peter Witte, associate director for PE at EY. “A lot of us have looked at the growing amount of dry powder and thought that the fundraising market would have to take a breather at some point. And we still haven’t seen that yet.”
PE has benefited from a number of trends that will continue even if a market downturn damps investor enthusiasm. Private markets continue to make up a larger share of the overall economy versus public markets, which have shrunk to half the number of listed companies over the past 20 years.
And the market continues to welcome new LPs, including sovereign-wealth funds, family offices, wealthy individuals and pension funds whose regulators have eased restrictions on private-market investing, Witte said.
Looking ahead to 2019, some consultants are predicting a year similar to 2018, with plenty of new funds and perhaps a return of more funds raising $10 billion or more. Three funds broke the $10 billion mark in 2018: Carlyle Partners VII, Hellman & Friedman Capital Partners IX and Warburg Pincus Global Growth.
“It’s going to be as busy, if not busier, next year, at least in terms of the number of funds,” said Christian Kallen of Hamilton Lane. “You will see more activity on the megaside next year, and many of the funds that are currently marketed as large, maybe the $8 billion kind of range, may come back next year and then break through $10 billion. There are probably quite a few within striking range of that kind of hurdle.”
While many investors are worried about an economic downturn in the coming year, those fears may not cause an immediate pullback from PE, according to Schroder Adveq’s Ethan Vogelhut.
PE held up relatively well during the Great Recession and the investors that continued to allocate to private equity during the down times generally saw very good returns.
“Performance during those vintages was still decent and a lot of those companies, they might have been a longer hold, but they did live to fight another day,” Vogelhut said. “So I think investors who are committed to the private equity space probably won’t be as quick to shut it off as they might have been before.”
Recession fears may cause LPs to retrench around core relationships and become less willing to commit to unfamiliar managers or outside-the-box strategies, Kallen said. If that happens, premier GPs are poised to capitalize, both through their primary investment funds and through side vehicles designed to give investors brand-name exposure to sectors and specialties.
“I think you will see a more conservative approach to picking fund managers than what we’ve been seeing in the last few years,” Kallen said. “LPs don’t feel like now is the time to experiment with first-time funds, or with new strategies, or unique, never-tried-before approaches to private equity.”
GPs will continue to try to stand out by increasing specialization within industry sectors, Kallen said. And they will continue to experiment with longer-dated fund structures, as well as GP-led secondary processes that can give LPs the choice between liquidity and sticking with a portfolio for longer, according to John Ayer, a partner at Ropes & Gray.
“The traditional model often tends to limit the time that a sponsor can own a particular business, and I think sponsors and investors are wondering whether that is always in their interest, especially if you’ve got a good business that’s performing well,” Ayer said.
Additional Data
Amount raised through Q4 2018 by fund type ($B)
Largest fundraisers in 2018 YTD
LBO funds raised by target size through Q4 2018 ($B)
Quarterly breakdown of amount raised by U.S.-based buyout and mezzanine firms ($B)
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