Private equity fundraising has soared to never-before-seen heights in recent years. According to statistics gathered by the financial research firm Pitchbook Data, PE firms in the United States managed to shatter fundraising records in 2019; as of November, buyout funds had raised over $246 billion for the year. This achievement continues a recent pattern of explosive growth — in 2017, investors shattered the then-record for fundraising by raising $238 billion for the year.
Pitchbook’s analysts believe that the fundraising gains are due in part to the number of “outsized” (i.e., significantly larger than the typical GP) firms operating at scale. As they point out, US private equity funds of $5 billion or above accounted for more than 50 percent of all fundraising through Q3 of 2019.
The fundraising gains are both notable and promising for the future. However, concerns about economic performance have begun to influence commentary on the matter. Some do have concerns about the similarities between our current growth pattern and the one that existed immediately before the 2007 recession. Critics also point out that current high levels of “dry powder” of uncalled capital could add fuel to a financial crisis if one did occur.
That said, analysts at prominent financial research firms remain cautiously optimistic. As writers for a recent Bain & Company report put the matter, “While the level of dry powder bears watching, a closer analysis of the dynamics at work today suggests there’s little danger of the buyout industry falling too far out of balance.”
The B&C authors further point out that the uncalled capital held in today’s buyout funds tends to cycle out more quickly (3.0 years of investment versus 4.6 years) than the dry powder in pre-Recession-era funds. Currently, reports indicate that buyout firms hold more than two-thirds of their dry powder in funds that are under two years. This suggests that the recent deal cycle is turning over older capital and drawing in new money within a suitable time frame.
Notable, too, is the volume of deals made by US PE funds. According to Dechert LLP, private equity firms invested $569 billion in 3,817 buyouts globally — an accomplishment which they note is “a post-crisis value record and the highest volume of deals in history.”
This pattern of investment seems likely to continue, given the significant amount of capital that firms have accrued and the pressure they face to make the most of that money. However, some companies have changed their deployment methods to suit current circumstances. Bain & Company analysts note that limited partners are directing increasing amounts of capital towards buyout firms in an attempt to use their large-scale funds. Some even believe that PE companies will, with larger funds and enormous quantities of available capital, start regularly targeting public companies as a source for larger deals.
Stiff competition for assets is forcing some GPs to consider more unconventional tactics. More funds are considering long-hold vehicles — funds designed to last for 15 or more years — for their investments. The Dechert LLP 2020 Outlook report notes that 26 percent of surveyed private equity firms had already established long-hold funds, while 51 percent had said that they were considering doing so. Notably, only 32 percent of firms had reported considering long-hold funds as an option when Dechert conducted its survey last year.
As analysts for Dechert write: “Innovative strategies are becoming commonplace as the industry is being forced to adapt to an overabundance of capital, with buyout practitioners moving into growth capital and minority stake investing and raising long-hold funds.”
In this light, the record-shattering rates of private equity fundraising are promising. While it would pay to maintain a cautious eye on the market and sociopolitical factors, it seems reasonable to be optimistic about the coming year — and to look forward to innovation within the investment sector.