Q1 Fundraising Roundup: The party doesn’t stop

  • U.S. fundraising approaches $50 bln through most of Q1
  • GPs returning with larger funds, faster
  • LPs bracing for declining performance

Five years into the hottest sustained period of fundraising in private equity’s history, U.S. general partners show no signs of cooling off.

With roughly a week remaining in the first quarter, general partners had raised a little less than $50 billion, Buyouts data shows.

That’s right around the quarterly average for fundraising going back to Q1 2012, a period Bain & Co called “unprecedented” in PE’s history of collecting fresh capital.

GPs globally collected $3 trillion over the past five years, according to Bain & Co’s annual PE report.

As was the case last year, large-cap buyout funds raising $5 billion or more dominated investors’ attention through early 2018. Notable closes included Carlyle Group’s $15.6 billion fund for U.S. buyouts, GSO Capital Partners’ new $7.1 billion capital-solutions vehicle and American Securities’ latest $7 billion flagship for upper-mid-market buyout funds.

The focus on large-cap buyout funds will likely continue unabated as firms like Hellman & Friedman, TPG and Vista Equity Partners raise fresh capital for their latest flagship vehicles.

TPG Sixth Street Partners, TPG’s credit platform, is planning to raise another $8 billion-plus across three other funds, Buyouts reported this year.

“When you look at the overall data, it doesn’t tell the full story because most of that capital is going to the most select funds that are highly oversubscribed,” said GCM Grosvenor’s Ya Tung, speaking at Buyouts Insider‘s PartnerConnect East conference. “Underneath it all, that’s the pocket of opportunity for LPs like us.”

Indeed, even with large-cap funds attracting the bulk of the attention, limited partners continue to view the middle market favorably.

That includes funds from newer faces like Brightstar Capital Partners, which raised $710 million for its debut, as well as more than $670 million each for flagship vehicles managed by Juniper Capital Advisors and Silversmith Capital Partners.

In some cases, the fundraising boom caused certain GPs to return to market more quickly than expected and with larger funds, Aberdeen Standard Investments’ Scott Reed told Buyouts.

And LP demand shows no sign of letting up, particularly for funds that are expected to be oversubscribed.

“You’ve got a frenzied situation where LPs are allocating for more capital [in funds] than they really want or need,” he said. “The leverage equation shifts to the GP’s advantage.”

Firms’ ability to raise larger funds more quickly is also pressuring investors to make decisions quickly, occasionally at the expense of due diligence or negotiations of terms and fees.

The pendulum — an oft-used metaphor used to describe who has leverage in fund negotiations — appears stuck in the GP’s favor.

LPs are increasingly anticipating when firms will market new funds and conducting as much due diligence as possible in advance of the formal fundraising periods.

“You have to be doing work long before they’re in market. So when they do come to market, you know you want to be in the fund,” said James Thompson, president and COO of GF Private Equity Group, also speaking at PartnerConnect East in Boston.

With dry powder continuing its steady climb, some LPs are beginning to wonder when it all will come crashing down.

At PartnerConnect East, Frédéric Godbout, deputy head of Caisse de dépôt et placement du Québec’s private equity team, said he’s underwriting funds to assess their ability to manage portfolio companies through a downturn at some point in the next three to five years.

“If you’re a private capital investor right now, you should unequivocally be expecting a compression of returns relative to right now,” Reed told Buyouts.

“They’ll still be better than public markets. You’ll still get a couple hundred basis points of outperformance. So you might as well load up.”