- US fundraising stood off-pace at $31.7 bln through mid-March
- Distressed, mezzanine fundraising beginning to rise
- KKR leads largest funds raised with $13.9 bln close
US private equity firms raised $31.7 billion through mid-March, according to Buyouts data. Early data suggests quarterly fundraising is off the pace from the $41.7 billion buyout and mezzanine shops raised in Q1 2016.
The final first-quarter tally may wind up, however, considerably higher than data initially suggests. Silver Lake was expected to hold a first close on as much as $12 billion in March, Buyouts reported earlier this year. Similarly, LPs have been pouring into Apollo Global Management’s new fund, which is seeking $20 billion with no stated hard cap, LP sources told Buyouts.
That’s on the heels of four straight years in which U.S. PE fundraising surged above $190 billion. The duration of the current fundraising boom is unparalleled over the previous two decades, per Buyouts data.
And the surge shows no signs of stopping. At the start of the year, Preqin pegged the number of funds in market at 1,829, targeting $620 billion in aggregate. While many of those vehicles are small or one-off ventures, the market for institutional-grade funds is seeing a similar glut.
“Last year, we saw 700-plus fund offering memorandums. That’s a lot of things to pick from, and that’s just guys raising $100 million or more,” said Erik Hirsch, vice chairman and head of strategic initiatives at Hamilton Lane, during a keynote at Buyouts’ recent PartnerConnect East conference in Boston.
Major limited partners show no signs of slowing their allocation pacing to the asset class as well.
Oregon Investment Council plans to commit $2.5 billion to $3.5 billion to PE this year, retirement-system documents show. Minnesota State Board of Investmentapproved $550 million of commitments in February and, a month later, University of California Board of Regents approved a plan that would double its PE allocation to 22 percent of its assets.
Even as investor interest in the asset class remains steady or expands, some — including gatekeepers and prominent LPs — are beginning to show healthy levels of caution as deal prices and dry powder escalate. Consultants like TorreyCove Capital Partners and Bain & Co noted in reports that high entry-price multiples complicate the outlook for traditional large buyout strategies.
“We’re pretty concerned about the market,” said Sandra Bosela of OPTrust Private Markets Group, on a panel at PartnerConnect East. She added that competitive auctions have overtaken deal market: “There’s a lot of dry powder out there, and it only takes one [buyer] to come in and outbid you.”
To that end, Cambridge Associates is urging its LP clients to pay attention to capital deployment and pricing as they place new commitments to buyout funds.
“As interest rates rise, tighter credit markets could inhibit exits/new investment activity and increase financing costs for existing portfolio companies,” Cambridge wrote in a report for San Francisco Employees’ Retirement System. “Investors should monitor the pace of their managers’ capital deployment.”
The same report noted that deal flow had slowed in 2016, suggesting that GPs were unwilling to deploy capital as prices climbed for new assets. PE firms typically paid a 10.3x EBITDA multiple on large-market deals, which Cambridge defined as enterprise values of $500 million or more. In the mid-market, multiples hovered at around 9x.
Notably, while Cambridge was bearish on large buyouts in its report, it considered distressed-for-control investment funds to be compelling in the current market.
Indeed, distressed and turnaround funds appear to have attracted disproportionate interest from LPs in Q1. Distressed funds raised $4.5 billion, Buyouts data shows.
Fundraising for mezzanine funds also spiked from the year-earlier period, when they tallied less than $1 billion. Mezzanine funds collected $5.9 billion, led by $1 billion-plus fundraises from Prudential Capital Partners, Carlyle Group’s energy mezzanine team and Crescent Capital Group.
The largest fund to close during Q1 belonged to Kohlberg Kravis Roberts, which collected almost $14 billion for its latest flagship buyout fund. Platinum Equity closed its latest megafund on $6.5 billion.