Q2 Fundraising: LPs pour into the megas as U.S fundraising hits $82 bln

  • Apollo, Silver Lake, others lead U.S. fundraising to massive Q2
  • GPs rush to raise new funds as economy enters late stage of a bull market
  • Fundraising moving faster; GPs grow aggressive on terms

U.S. private equity raised $85 billion in the second quarter, a 67 percent surge that puts domestic fundraising on pace to surpass $250 billion this year, approaching totals not seen since before the global financial crisis, according to Buyouts data.

The total was boosted by massive hauls from firms like Silver Lake and Vista Equity Partners, both of which announced final closes on vehicles that collected north of $10 billion.

Apollo Global Management was widely reported to have raised $23.5 billion for its latest flagship fund, which represented more than a quarter of what the entire U.S. PE industry raised in Q2.

All told, megafunds targeting $5 billion or more represented more than 70 percent of the industry’s total haul in Q2. And new megafunds raised by the likes of Bain Capital and New Mountain Capital are setting the stage for a very strong second half.

The comparative numbers were close to each other: $51 billion in Q2 2016 and $50.8 billion in Q1 2017.

“I’m not surprised to hear the Q2 numbers were strong; there were a few huge fundraisings, punctuated by Apollo,” said Scott Reed, co-head of U.S. private equity for Aberdeen Asset Management. “It’s no secret that the fundraising market today is as good today as it’s ever been.”

That certainly appears to be the case, particularly considering SoftBank’s $93 billion technology fund wasn’t counted toward the Buyouts fundraising total. U.S. PE fundraising previously peaked in 2007 when firms raised $292 billion.

Similar recent upswings in fundraising were reported by other organizations as well. Preqin reported global fundraising totaled $121 billion in Q2 — more than any other quarter over the previous five years. Pitchbook pegged global PE fundraising at a little more than $106 billion, with more than half the funds to hold closes coming from North America.

“I think the primary reason is it’s a hot fundraising market, and people are concerned about a downturn in the public markets that could [lead to] a freeze in LP commitments,” said David Fann, president and CEO of TorreyCove Capital Partners.

For several years the private equity industry has been braced for a sudden, unexpected shock to upset the fundraising environment. During the global financial crisis, nosediving public-market valuations caused many major institutions — mainly public pensions — to become severely overweight in their allocations to PE. As a result, commitments to new funds slowed to a trickle.

Even amid an increasingly volatile geopolitical climate and the possibility of the “Trump bump” fading, public-market stock prices continued to chug along through mid-July. As the Federal Reserve projects higher interest rates, and the U.S. political environment becomes increasingly dysfunctional, firms are returning to market quickly in preparation for what some see as an inevitable downturn.

“GPs are smart. They know that the gravy train has lasted,” one LP told Buyouts. “If you can raise as much as possible before the market turns, you have to take advantage.”

Speedy fundraises, tougher terms

Given the fundraising environment, it’s not particularly surprising that most firms are raising larger funds at a faster clip than any period over the previous decade. Firms holding a final close in the first five months of t—he year spent an average of just 12 months on the market, compared with 17 months for 2016 vintages, according to Preqin.

By the same token, well more than half the funds raised hit or exceeded their targets. For funds raising $5 billion or more, the percentage climbed to 86 percent.

Limited-partner demand for PE gave some firms incentive to become aggressive on certain fund terms around the margins, Reed told Buyouts. While a handful of firms successfully fought for significant changes — such as reducing the minimum return they’d have to hit before collecting carried interest — other, smaller firms took a more nuanced approach.

Some firms transitioned to distribution models that favor the general partner, while others adopted key-man provisions that give more leeway to the firm, should important members of the investment team depart.

“It feels like aggressive asset gathering,” Reed said. “But LPs are still tripping over themselves to get access to that manager.”