PE fundraising is mirroring the 2007 boom

September 2017 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

September 2017 Issue

For a decade, 2007 was the standard bearer for fundraising in the US private equity (PE) market, with a large number of investors committing huge sums to PE vehicles. However, based on data from the first half of 2017, it may be usurped. According to a new report from Pitchbook, ‘US PE Breakdown: 2017 2Q’, fundraising in the US in the first half of 2017 and in the second quarter in particular, has been reminiscent of the fundraising boom seen in 2007. Though the fundraising figures recorded in 2007 are unlikely to be topped this year in terms of quantity, Pitchbook believes that in terms of dollars and cents, 2017 “may eventually prove unequalled in private equity’s annals”.

In H1 2017, US PE firms raised $113.4bn across 117 funds. By contrast, 281 funds raised $209bn in all of 2016. Accordingly, based on capital commitments in the first half of the year, fundraising is on pace to surpass $220bn. Notably, half of the cash committed has been to mega funds – those with more than $5bn in commitments.

Funds with commitments of less than $100m account for a smaller percentage of closes. The median fund size reached during H1 2017 was $275.1m, up from $250m. The growing size of the typical fund shows that investors are bullish on PE returns and willing to commit greater amounts of capital to the asset class. Due to larger commitments by LPs, 92.7 percent of funds hit or exceeded their target.

Mega funds, however, enjoyed a particularly active first two quarters of 2017, accounting for 50 percent of all capital raised. As such, mega funds are on course to generate 50 percent or more of all capital raised for the first time since 2007. CVC Capital Partners VII closed a €16bn fund in June, Silver Lake Partners V closed a $15bn fund in April, in March KKR America’s XII fund closed at $13.9bn, Vista Equity Partner’s Fund VI closed at $11bn in May and in April, Clayton, Dubilier & Rice Fund X closed at $10bn.

Furthermore, the average time to close for mega funds also decreased in H1, a further sign of investors’ confidence in these types of funds. The average time fell to 12.3 months from 15.2 months for PE overall, and 10.8 months from 14.3 months for buyout funds during the first half of the year.

Though there are fewer funds raising more money, this boosted the average size of closed PE funds in H1. That figure sits at nearly $977m, the highest figure on record. In 2007, private equity funds closed on an average of $953m.

According to Pitchbook, the “fundraising craze” shows little sign of abating. With public pensions facing shortfalls, the impressive returns PE is able to generate will likely prove an attractive investment for many going forward. Ninety-three percent of US vehicles hit their initial fundraising target in the first half of the year, the highest amount since 2006.

Bain & Co, however, expects fundraising in the US to slow in the coming months. Given the four year fundraising boom which has engulfed the US PE market and the record levels of dry powder amassing at $545.5bn, according to Pitchbook, it is becoming increasingly difficult for funds to close deals, particularly amid strong competition from corporate acquirers. Across the US, 866 deals were completed in Q2, totalling $151.1bn in value, slightly down year on year. PE firms closed just five deals worth at least $2.5bn in H1, on pace for the fewest of any year since 2012 and well-behind last year’s count of 20. As a result, the challenging deal environment could act as a roadblock to future fundraising prospects.

Richard Summerfield