A decade hence

Martin Halusa, CEO of Apax, said this week in Davos that he can envisage private equity firms raising US$100bn funds within the next ten years. A look back at the private equity industry a decade ago shows that this comment may not be as fanciful as it first sounds.

Back in 2005, the top ten fundraisers were all US-based, with the largest, GS Capital Partners II pulling in just over US$1.4bn.

Fast forward another ten years, and the list comprises six European-focused vehicles, with US-based Blackstone at the fore.

Blackstone is currently targeting around US$13bn, representing almost a ten-fold increase on GS Capital Partners’ 95-vintage fund. In the much less mature European market, fund sizes have increased even more dramatically, with Permira believed to be touting an ?8bn vehicle to its investors.

Blackstone would have to grow its latest fund by 7.7 times to reach the US$100bn level touted by Halusa but, given the historical track record, this may not be as outlandish as it first seems.

However, as buyout pros are wont to say, ‘you don’t drive by looking in the rear-view mirror.’ While forward looking data on institutional asset allocations are, by their nature, difficult to come by, there is some evidence to suggest that low-bond yields and uncertain equity returns are causing investors to tilt allocations toward alternatives. According to a recent Russell report, the mean strategic allocation of European institutions rose from 4% in 2003 to 4.5% in 2005 and is predicted to leap to 6.1% by 2007.

This shift is even being reflected by European Governments. In recent announcements, the Dutch and French state pension funds have set allocations of 6% for alternative assets, while the Irish state pension intends to commit 8% of its funds to private equity by 2009. 

Much of this is simply Europe playing catch-up with the US, where private equity has been an established part of the investment mix for many years and already accounts for 7.3% of allocations. Helen Steers, a partner at fund-of-funds group Pantheon, said: “It is no real surprise that investors have smaller allocations than their US counterparts; however, average strategic allocations in Europe are increasing rapidly.” In Asia and the Middle East, where private equity investment has been virtually non-existent, allocations are likely to grow even faster.

A small percentage increase in weighting amongst existing investors, combined with a greater number of first-time investors will have a disproportionate impact on well established top-performing funds.

What became clear in the last fundraising round was that more capital is gravitating toward a select group of firms with a proven long-term track record. Many reported that they were significantly over-subscribed, whilst institutions said that they were finding it more difficult to get access to the top performers.

While the US$100bn fund may seem far-fetched now, evidence suggests a long-term institutional shift toward the asset class and a concentration of this capital in the hands of a select group of firms.