Back to School: PE expected to raise more, pay back less

With private equity’s record of long-term outperformance pushing up LP interest, 2016 may mark the second-best year for fundraising next to 2008’s record, according to a quarterly update from placement firm Triago.

The first quarter’s tally of $136 billion set a mark as the highest three-month period since the global financial crisis.

Triago expects $518 billion to be taken in by GPs this year. That is up 11 percent from a total of $466 billion in 2015 and approaches the record $557 billion in 2008, Triago said.

At the same time, distributions to private equity LPs fell 17 percent to $105 billion in the first quarter. Cash generated from realized investments has dropped for three quarters in a row after setting a record $133 billion in the second quarter of last year.

Triago expects distributions to fall 16 percent to $420 billion in 2016 from $502 billion in 2015, part of a trend expected for the next five years.

“Distributions will diminish further in the next half-decade, as lean fundraising and slow investment following the financial crisis translate into fewer realizations,” Triago said in its report. “Steadily increasing allocations to private equity and the circumstances fostering that expansion — slow growth and the likelihood of a sustained period of low global interest rates — make further annual fundraising highs likely.”

Stock market volatility along with private equity’s micro focus and lack of correlation to public markets continue to appeal to investors seeking returns in a flat interest rate environment, the study said.

“After meeting with hundreds of investors year-to-date, Triago believes an unprecedented number are currently increasing their allocation to PE relative to other assets,” the study said.

Meanwhile, in the secondary market dollar volume fell 9.1 percent to $13 billion through May 16 from $14.3 billion in the year-ago period. Pricing on secondaries averaged 91 percent of net asset value, down from 94 percent.

“Transactions this year have been priced with the depressed values of last year’s third-quarter in mind, when funds fell 3 percent on average,” the report said. “With 2015’s fourth quarter improvement in net asset value — 3.3 percent appreciation across all geographies and strategies — now clearly in focus and appreciation in the first quarter, transaction volume and pricing are likely to increase.”

Private equity funds with vintages greater or equal to nine years comprised about 28 percent of the market in the first quarter, up from 18 percent of the market in the year-ago quarter, according to Triago data not included in the quarterly report.

Action Item: Triago publications, http://bit.ly/1UdxRyW

Photo courtesy of ©iStock/Pixfly