Back to School: On fundraising side, PE parties like it’s 2007

  • Fundraising on track to $220 billion, equal to 2007
  • Half of commitments through June went to megafunds
  • 2016, 2017 vintage returns pressured by high asset prices

Fueled by public pensions facing shortfalls, private equity funds are amassing capital at pre-recession levels, Pitchbook reports.

But even with fund sizes swelling, megadeals are hard to come by: Only five transactions worth at least $2.5 billion closed through June this year, on pace for the fewest since 2012.

“U.S. private equity funds have become larger, they’re taking less time to close, and also a higher percentage of them are hitting their fundraising targets than in 2007,” said analyst Dylan Cox. “Fundraising is on track to be about $220 billion, also about equal to 2007, so we’re really seeing a lot of similarities with that pre-crash year in fundraising.”

But deal flow remains slightly below last year’s level. High prices and competition from corporate and strategic buyers represent challenges for PE, as Amazon’s acquisition of Whole Foods shows. (At least four PE firms and the grocery chain Albertsons, owned by Cerberus Capital, also made bids.) According to Pitchbook, Whole Foods CEO John Mackey “no doubt preferred a takeover offer from his eventual acquirer.” Such anti-PE bias, and the enormity of corporate balance sheets, has kept the number of megadeals down.

Megafunds, on the other hand, are definitely back: Pools with more than $5 billion in commitments claimed half of all capital raised through June (a total of $113.35 billion by 117 funds). With AUM at a record $1.47 trillion as of year-end 2016, the number of U.S. PE firms is actually decreasing. Consolidation in the industry is driven by financial-services companies acquiring each other in order to offer investors a fuller menu of services in-house, Pitchbook explained.

Due to impediments to deploying capital, dry powder is piling up: $545.5 billion sits on the sidelines, and that doesn’t include “shadow capital” from sovereign wealth funds and pension funds, in the form of co-investments or direct investments not in traditional fund structures.

Does so much capital chasing too few deals, and the obvious parallels with 2007, mean that private equity is in a bubble? “The market is certainly overvalued,” Cox said. Asset prices are higher than at any point since the financial crisis, “and I would emphasize the effect that that has on returns.” In past cycles when EBITDA multiples have been as high as they are now (around 10.5x for M&A transactions), future returns paid the price. That’s something to watch with respect to 2016 and 2017 vintage funds. Increased use of debt also makes for a cloudier forecast.

In their search for returns, PE funds are turning to IT companies, which can offer high-growth opportunity in a low-GDP environment. Tech now accounts for 20 percent of all deal flow, Cox said, “higher than it’s ever been. We expect that to continue and to be a rising trend within the industry.”

Action Item: Download Pitchbook’s 2Q 2017 US PE Breakdown here.

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