The single biggest mistake LPs can make today is over-allocate to 2016-vintage funds, Blackstone’s global head of private equity Joseph Baratta said Tuesday at the Wall Street Journal Private Equity Analyst Conference in New York.
During a panel titled “Off the Beaten Path”, Baratta said the current market environment – marked by historically high valuations for assets and low returns – is the most difficult he has ever experienced as an investor.
“I have never seen it in my career”, he told the audience. He warned LPs to avoid concentrating too much capital on funds being raised this year, comparing the danger to the pre-crisis boom years of 2006 and 2007, when LPs rushed to make commitments to private equity funds.
The amount of capital raised by GPs across the globe soared in the years leading up to the 2008 financial crisis. In 2006, some $538 billion was raised, almost double the amount raised in the preceding year, according to Bain & Company. That number climbed to $666 billion in 2007, before peaking in 2008 at $681 billion, the record-holder to this day.
While the amount private equity funds raised fell sharply in 2009, to $318 billion, it has been inching up toward pre-crisis levels. Last year private equity firms raised $527 billion, according to Bain.
And the ease with which funds have raced past their targets shows that fundraising continues to be buoyant. In some cases, funds have even blown past their hard-caps. For example, French private equity house Astorg stretched its hard-cap on its sixth fund, which closed in June, from €2 billion to €2.1 billion to accommodate investor demand, while Thompson Street Capital Partners closed TSCP IV on $640 million, above its $600 million hard-cap, in December.
According to PEI data, the first-half of 2016 saw $216.54 billion in capital raised, the second highest level of H1 fundraising since 2010.
All that said, some LPs said allocating to 2016-vintage funds can make sense as part of a diversified portfolio.
“Even with valuations where they are, diversification across vintage years is an important thing,” said Wylie Tollette, chief operating investment officer of the California Public Employees’ Retirement System (CalPERS), who was speaking on a separate panel.
America’s biggest public pension fund, which manages about $301 billion in assets, committed nearly $1 billion to private equity in July, as reported by PEI.
However, the biggest public pension fund in the US currently allocates 10 percent to private equity, below the 12 percent long-term target allocation, because valuations are high, Tollette said.
While CalPERS is continuing to commit to private equity funds, it is eyeing a sharp reduction in the number of GP relationships it manages. A few years ago, CalPERS had some 700 individual investments with 300 GPs, but it has whittled these relationships down to 100 fund managers today, and is headed toward just 30 fund managers, Tollette said.