Fundraising falls in Q1, but pipeline remains strong – Quarterly Fundraising

  • U.S. GPs close on $41.7 bln, 40 pct decline from Q4 2015
  • Globally, more than 2,600 funds in market, says Preqin
  • Mega funds attract most attention from LPs in Q1

U.S. private equity funds closed on $41.7 billion in the first quarter through March 23, a 40 percent decline from the $69.6 billion general partners raised in Q4 2015, according to Buyouts data. But even as fundraising declined in the first quarter, it didn’t feel that way to LPs, sources said.

“It still feels like all of the really good funds are having no time closing,” said New Jersey Division of Investment Director Chris McDonough.

More than 2,600 funds were in market seeking $946 billion at the start of the year, according to Preqin data cited by Hamilton Lane in a February investment report. The same report indicated that large and mega funds were driving global fundraising.

The trend was apparent in Buyouts data. Mega funds targeting $5 billion or more raised $21.7 billion in the first quarter, led by Advent International’s $13 billion final close on its eighth flagship fund. The firm wrapped Advent International GPE VIII after just six months on the market, according to a March 22 news release.

Perhaps more interestingly, Advent completed the close even after it dropped an LP-friendly 8 percent preferred return from Fund VIII’s terms.

LPs have also backed mega-funds raised by Kohlberg Kravis Roberts & CoTPG Capital and Vista Equity Partners in recent months.

Beyond large buyout funds, market volatility in early 2016, along with cratering energy prices, helped spur demand for distressed and turnaround funds, which raised $2.46 billion during Q1. Oaktree Capital Management’s 10th flagship distressed fund, the $3 billion Oaktree Opportunities Fund X, kicked off its investment period in January, according to an investment presentation.

“We expect a meaningful uptick in the U.S. high-yield-bond default rates over the next 12 months with the distressed energy sector contributing most significantly,” said Oaktree Co-Chairman Howard Marks in a February earnings call. “As I believe you know, over the last five years, the average default rate has been just about the lowest in history for such a period.”

In addition to distressed, growth-equity strategies attracted considerable attention from LPs in the first quarter. Growth funds raised $3 billion, more than any other strategy tracked by Buyouts.

“I think their narrow and niche focus will help them raise capital quicker, not only because of their focused approach, but the fact that many may be raising less capital than generalist buyout funds,” said Nizar Tarhuni, a senior analyst with Pichbook.

In February, Mainsail Partners closed its fourth growth-equity fund on $384 million. The fund was oversubscribed. Growth-equity specialists Main Post Partners and Sverica Capital Management also held final closes.

“Venture and growth continues to be active, obviously with smaller fund sizes,” said Christian Kallen, who works on Hamilton Lane’s fund-investment team. Kallen also said  some LPs are losing enthusiasm with certain late-stage growth funds. “There is more and more news about startups raising down rounds, and I think more people are thinking about that.”

To that end, many  limited partners tracked by Buyouts released their commitment pacing plans in the first quarter. Many public pensions, such as the Santa Barbara County Employees’ Retirement System and Los Angeles City Employees’ Retirement System, moved forward with plans to commit roughly similar amounts as they had in previous years.

Others, like the Massachusetts Pension Reserves Investment Board and Los Angeles County Employees Retirement Association, opted to slow their pace to accommodate a changing market environment and allocation targets. Few took as drastic a step as Oregon Investment Council, which slashed its target allocation to 17.5 percent from 20 percent last year because of tighter fund terms and high asset valuations.

“We’ve seen a couple of large institutions cut their allocations, trying to be proactive. Really hard to do,” said one LP advisor. “It’s kind of chest beating, in my mind.”