Private equity funds are getting bigger…and bigger

The size of private equity funds continued to rise in the third quarter, a trend that says a lot about conditions in the market.

Year-to-date, the average fund closing was $754 million, according to Buyouts data. This may not sound big – it is, however, higher than annual averages stretching back several years. It is 20 percent larger than last year’s average of $629 million and 66 percent larger than 2021’s average of $454 million.

This can be explained by the discrepancy between capital raised and funds closed. Both have declined since 2022 as the gap between strong GP demand and weak LP supply slowed the pace of fundraising. But the number of vehicles has fallen much more than the volume of inflows.

For example, in the first three quarters of 2023, private equity funds in North America raised $390 billion, down 11 percent from a year earlier, Buyouts reported. In the same period, fund closings, totaling 554, dropped 43 percent.

The discrepancy was even sharper in the third quarter, when the two indicators moved in opposite directions. Capital raised, totaling $153 billion, grew 16 percent from a year earlier. In striking contrast, fund closings were down by 50 percent.

Third-quarter results owe to a few giant flagships closing at the same time. They included this year’s largest: Clayton Dubilier & Rice’s 12th buyout fund, wrapped up at $26 billion. Along with it were Apollo Global Management’s 10th buyout fund, closed at $20 billion, and Warburg Pincus’ 14th growth fund, closed at $17.3 billion, among others.

These data tell us something important about today’s fundraising market. With LPs facing cash constraints, GPs of all types and sizes have been keeping their offerings open longer and, in many cases, requesting extensions. Because of this, diverse sponsors have also experienced pressure on their targets.

But larger GPs, even those spending more time on the road and trimming targets, appear to be faring better than their smaller peers.

Big, multi-strategy GPs are a key beneficiary of the current LP focus on incumbent relationships. They also seem to be benefiting from a more recent development: LP culling of relationships in favor of a smaller and more manageable group of high-performing funds.

This suggests a by-product of slower fundraising could be the creation of haves and have-nots. Due to a bifurcation in outcomes, some smaller GPs wishing to remain on a growth path might have to consider fresh options – among them teaming up with a larger sponsor.

Private equity has recently seen a number of high-profile M&A transactions. In May, TPG struck a $2.7 billion deal to buy credit and real estate firm Angelo Gordon. And in September, Bridgepoint and energy transition specialist ECP agreed to merge, reflecting an upfront value of roughly $1 billion.

There will likely be more to come. This week, Brookfield Asset Management said it is eyeing M&A opportunities arising from broad-based consolidation across the alternative assets landscape, Buyouts reported.

The $865-billion firm has close to $3 billion of balance-sheet capital to deploy to near-term initiatives, CFO Bahir Manios said in a Q3-2023 earnings call, including “something strategic on the acquisition front.”