This summer has been phenomenal in terms of fundraising. Records for the largest private equity fund closures have been set and reset. Just three months after Permira IV issued its information memorandum it is on course for €11bn, making it the largest ever private equity fund raised outside the US.
But for every record set in Europe, the US private equity industry answers back. Permira’s answer came from Blackstone. This summer the New York-based group raised the largest private equity fund in history. Blackstone Capital Partners V has total commitments, so far, of US$15.6bn. And First Reserve, a US-based private equity firm that specialises in energy investments, has closed its latest funds, the First Reserve fund XI, with commitments of US$7.8bn.
Though these mega funds make interesting headlines, are they actually good for private equity as a whole? Or are these mega funds cannibalising mid-sized ones? Statistically, most LPs in private equity are planning to increase their allocations. According to data published by Private Equity Intelligence, just over half of all LPs are planning to invest additional cash into private equity. But 41% are not planning to change their allocation levels at all.
Some institutions are selling their current fund holdings to free up hundreds of millions of dollars for the larger buyout funds when they do not wish to generate further capacity by increasing the allocation to private equity.
Several private equity fund managers have commented that they are seeing an increased willingness among pensions to rebalance their portfolios. Whereas a few years ago it seemed as though pensions were going to remain LPs until the end of a fund’s life, it is now much more acceptable for these investors to trade out.
So we can only deduce that a significant proportion of the €11bn raised by Permira this summer and the US$15.6bn raised by Blackstone have actually been withdrawn from smaller funds that are less capable of replacing these without significant fundraising costs.
It will be interesting in the first quarter of 2007 when the fatality figures for private equity funds become available for 2006. We may find what was hailed as a great year for private equity was actually quite detrimental for the industry as a whole and concentrated too much money in too few hands.
As one raised in Arkansas, my Father used to say, mostly when I was complaining about older cousins holding me down and rubbing the rear end of fireflies all over me to make me glow with a green colour that would suggest a nuclear accident, ‘If you can’t run with the big dogs, stay on the porch’. I pass this piece of homespun wisdom on to those that have had their investors wooed by mega funds this summer. And suggest that theses porches become the niche patches that mid-sized private equity funds are so good at exploiting.
A group clearly already taking this advice is Gresham, the UK-based buyout specialist. This group has just closed the Gresham Four fund with £340m. This firm focuses on management buyouts of up to £100m, exclusively in UK mid-market companies. By figuring out what they can do differently and well, Gresham was able to appeal to investors such as: AlpInvest, ATP Private Equity Partners, Morley Fund Management and Standard Life Investments and close its fourth fund in record time.
Another group profiled in this month’s funds news is Gilde Healthcare partners. They have gone beyond niche with the Gilde Healthcare II fund and into deep niche territory. This fund invests in European start-ups in the healthcare sector including diagnostics, therapeutics and medical devices. It has just had its first close on €85m and its investors include fund-of-funds, family offices, banks and biotech cross-over funds.