U.S. buyout firms reported their lowest fundraising numbers for the third quarter, signaling that investors are waiting to see where the market is going as anticipation of an economic recession looms.
Funds raised a combined $73.2 billion in the third quarter, lower than what was raised in the second quarter, but a noticeable increase from the same quarter last year, when buyouts raised $49.3 billion.
“Q3 is usually the lowest quarter of the year; it’s felt that way this year,” said Peter Martenson, partner at global fund placement agent Eaton Partners. “If the re-ups don’t absolutely need to be done this quarter, people are pushing them off to the next quarter until they think there’s more clarity on where the overall economic trend is going.”
Despite a sluggish third quarter, more than $245 billion has been raised in 2019 to date, compared to the $135.8 billion raised in the first three quarters of 2018. Last year’s combined fundraising total was $244.5 billion, due in part to a large fourth-quarter haul that brought in $108.8 billion.
“I feel like I’ve been saying this every quarter of late, but we’re as busy as we’ve ever been right now,” Co-Head of U.S. Private Equity at Aberdeen Standard Investments John Dickie told Buyouts.
Dickie added that existing managers are looking forward to heightened activity in the fall and the first quarter. “In the last few weeks alone, we are getting calls left and right from GPs and placement agents that are wanting to talk about their next fund.”
GPs want to get their funds raised and LPs want to increase their allocations to funds, said Dickie, who feels that supply and demand economics are at play. “It’s all sort of colliding into a situation that creates a very busy environment for all of us who participate in the industry.”
The 10 largest fundraisers through the third quarter raised $103.6 billion. Funds such as Blackstone Capital Partners VIII and Advent International GPE IX, exceeded their fund targets, as of Sept. 20. Blackstone’s global buyout fund raised $26 billion through Q3, surpassing its $25 billion target. The fund had a $22 billion first close in March, Bloomberg reported; Advent International’s GPE IX fund raised $17.5 billion to date, exceeding its $16 billion target.
Emerging managers are focused on small and middle markets, according to Martenson. “They’re looking at companies that are back to those platinum style funds where there’s corporate investitures, spin-outs and reasons you can get deep-valued buys.”
First-time managers have also shifted focus toward specialization, a strategy that better positions them to attract LP capital, Dickie said.
“As we think about the first-time funds that we recently backed or are looking at now, every one of them has a very real reason to exist,” he said. “Could be a sector of focus, could be a regional focus, it could be a specific investment style, such as turnaround investing, which in and of itself is a specialization.”
According to data from Buyouts, industry-focused funds raised $96.2 billion through the third quarter, with the technology sector bringing in $39.5 billion; followed by $29.3 billion in healthcare; $11.7 billion for energy & power; $9.7 billion for industrials; and $5.9 billion for consumer products/services.
“Everyone wants a specialist. So, you better be a specialist in whatever strategy that you have,” Martenson said, adding that a potential downside for LPs going toward more sector-specific funds is that they assume more of the risk in their investments.
“That LP better be right that if they pick healthcare they’re happy with healthcare being an industry they want to be in going forward … You don’t give that GP the ability to pivot where there may be more compelling opportunities in the current economic environment,” he said.
As talks of an economic slowdown grow louder, GPs are anxious to raise funds before the window closes, Dickie said.
Allan Majotra, managing partner at 5 Capital Fund Placement, said that investors are having more discussions “around things such as valuations, market volatility, and the overall, global growth slowdown.”
Investors are already gearing up for 2020’s fundraising cycle, according to Martenson. “Normally it’s not that noticeable, this year it’s been a bit more noticeable because of all of the noise in the marketplace.”
Brian Rodde, managing director at Makena Capital Management, said that investors should “be disciplined” and “be conscious of the market environment” as they look past the third quarter.
“We remain enthusiastic about the opportunities at the lower end of the middle market, where we’re able to find partners that are able to access companies still relatively early in their trajectories, and where they can then ultimately sell them onto either strategic sponsors or in certain instances actually list them publicly,” Rodde said.
Action Item: Download the file here: Q3 2019 Fundraising