We may have mentioned it before, but there is a lot of capital flowing into private equity.
In a year which saw the largest euro-denominated fund (CVC Capital Partners’ Fund VII), the largest Asia-focused fund (KKR’s third Asia fund) and the largest fund, full stop (Apollo’s Fund IX) raised, fund size is rising. The average raised in 2017 was $754 million compared withjust $508 million in 2014.
However, a series of banner fundraises don’t explain the growth of the market. One important driver is the sideways expansion of blue-chip franchises into new strategies, geographies and asset classes. Whatever you do, don’t call it style drift; it is established managers with the infrastructure, connections and know how to offer their investors a comprehensive access to private markets.
What does this mean for institutional investors? In a nutshell, more work and tighter due diligence deadlines. In December Hamilton Lane said it had received a record number of private placement memoranda in 2017 – around 800 – and that this, combined with faster fundraising processes, has made it difficult for some investors to make considered decisions. “It’s putting a lot of pressure on LPs to be able to make those timely decisions to commit to the hardest-to-access managers,” Brian Gildea, managing director in the firm’s co-investment team, told PEI at the time.
This chimes with what we hear from other investors and GPs: the number of funds in market and the compressed fundraising timelines are making it tricky to do anything but re-up with existing relationships. No wonder some LPs are frustrated by GP-led restructuring proposals that add to their workload.
To put it another way, if you were a fan of Warburg Pincus 10 years ago, you could be re-upping with a flagship fund every two to three years. If you are a fan of the firm today, you could be committing to a China fund, a financial services sector fund, an energy fund and a flagship fund.
New managers, or even established managers looking for new relationships, are struggling to get a foot in the door. Indeed, last week we heard from Pollen Street Capital that it had – after a full two years on the road – closed its debut fund as a fully independent firm above target on £402 million ($560 million; €455 million). The firm’s track record across its financial services deals – a gross IRR of 29 percent and 2.9x money multiple – was not enough to warrant a quick fundraise because, among other things, LPs were spending so much time and capital on re-ups, said managing partner Lindsey McMurray.
US public pensions made more commitments to private equity funds than any other alternative asset class in 2017, according to research from eVestment. Are LPs expanding programmes, but not their own headcount? That was the view of one placement agent we spoke to this week.
As institutions up their allocations to private equity – and research tells us this what will continue to happen – they should think hard about how they allocate resources, as well as capital, to generate the best returns.
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