This year could be a record one for private equity fundraising, with a new report forecasting that 350 funds will achieve successful final closes, raising a staggering US$200bn or more on a global basis.
In total, there could be in excess of 800 funds looking to raise US$250bn in 2005, says the report from research firm Private Equity Intelligence (PEI). This compares to 284 funds that achieved final closes for an aggregate of US$136bn worldwide across all fund categories last year – and that was a 50% increase in the number of funds raised and nearly double the value of the tally for 2003.
The US$250bn target for 2005 includes 508 funds already on the road with a combined target of US$137bn, divided between 355 follow-on vehicles and 153 first time funds. Additionally, there are a further 300 follow-on funds that are likely to come to market in the buyout and venture categories alone, based on an analysis of uncalled commitments.
News from the demand side is just as robust. Cash flows and target allocations are the two crucial factors that will shape the fundraising environment this year.
From the first to the third quarter of 2003, LPs experienced a net cash outflow from their private equity portfolios. The contributions they made worldwide were significantly ahead of the distributions they received.
All that changed between the final quarter of 2003 and the second quarter of 2004, however. During that period, distributions outstripped contributions to the tune of around US$36bn. The resulting net position for the entire period was a strong flow of cash back to LPs, a trend that even seems to have accelerated in the last two quarters of 2004.
And the majority of LPs, perhaps as many as two thirds, are significantly below target allocations to private equity. The gap could be as wide as US$160bn worldwide, the report says. The allocations are subject to review and, on balance, are likely to increase rather than decrease, especially outside North America, where general allocations to private equity are lower. Many LPs may be revising their targets upwards.
Overall supply and demand have rarely been so positive for fundraising. LPs are encouraged by favourable cash flows to make new commitments. They will need to make additional commitments if they are to get any closer to target allocations, and there is a ready supply of funds already in the market.
Buyouts are set for a bumper year, although the issue in Europe will be about investing all the money raised, as competition for assets is fierce. First time funds will also continue to find conditions challenging if they lack a compelling story and differentiation.
There are about 37 funds in the market looking to raise just under US$40bn, and PEI predicts that a further 45 follow-ons will come to market this year.
Carlyle brought in US$5bn towards its fourth US buyout fund at first close, and is on the road in Europe to raise as much as €2bn for its European fund. Apax is on the road with a €4.5bn target, and Cinven’s €4.4bn fund is over 40% called. Elsewhere, CVC US$4bn’s fund is 50% to 60% called, and expected to launch early this year; Warburg Pincus is over 60% called, and a follow-on to the US$5.3bn vehicle is expected soon; KKR is on the road with a US$3.5bn target, and Blackstone’s US$6.5bn fund is about 30% called.
Fundraising will also continue its international focus. Over half of the new funds raised in Europe have at least some LPs from outside the region, and on average 32% of funding came from outside Europe. The figure is inflated by the larger funds, which are most able and likely to look overseas for investment. The smallest funds have tended to raise commitments from LPs in their own countries, while middle-sized funds have had some involvement from outside Europe.