Back to School: High valuations pump the brakes on successor funds

  • PE firms averaged 4.25 years between funds in 2018
  • High valuations, competition for deals have made it harder to put capital to work
  • Once PE funds come to market, they are closing faster

PE firms are taking longer to return to market with new funds, with high valuations temporarily reversing a trend of accelerating fundraising cycles.

The average time between funds increased to four years and three months in 2018, the first such increase in five years, EY’s quarterly PE Pulse report shows.

The speed at which GPs have been returning to market has been a source of concern for many LPs, who worry that GPs are simply taking advantage of high demand without fully deploying capital from previous funds or building full track records for investors to evaluate.

“All roads lead back to the valuation environment we’re in right now,” said Peter Witte, associate director of PE at EY. “It’s challenging to put large amounts of capital to work, so the pace of commitment callups has been slowing, and that’s had an impact on the need for new fundraising.”

The increase in time between funds in 2018 was relatively modest and is unlikely to reverse the longer-term trends that have encouraged GPs to come back to market faster, Witte said.

“The secular trends that are pushing capital into the asset class are huge, and they are accelerating the flow of capital into funds,” Witte said. “If there are some cyclical dynamics that are causing a downturn in the speed at which funds are being raised, the long-term secular trends [very much favor] more capital flowing into private equity, at greater velocity.”

While GPs might have slowed the speed at which they come back to market, once they decide to raise a new fund, they are hitting their targets faster than they have in a decade, according to EY.

The median time to close PE funds in 2018 was 12.5 months, the fastest since the financial crisis, according to the report. That average was driven up by increasing demand from LPs, and by the fact that there were fewer first-time funds, which generally take more time, in the market in 2018.

Action Item: Read the full quarterly report from EY here