Macro-economic uncertainty is benefiting the well-established large-cap buyout funds currently in market as LPs seek a safe place to park their capital, said Sunaina Sinha, founder and managing partner of placement agent and advisory firm Cebile Capital.
“Volatility causes a flight to safety,” she said. “Where is your capital safest in private equity? With the large-cap buyouts, who are the largest and the most diversified, and you’re not more than a certain percentage of the LP base because you’re in a $9 billion fund alongside hundreds of other LPs, and they’re doing tonnes and tonnes of deals so they’ve got 20 partners or 30 partners. Your capital is safest there.”
Sinha said the big funds in market in Europe today from the likes of Apax Partners, BC Partners and Advent International are occupying the bandwidth of most LPs.
Apax is targeting $7.5 billion for its seventh flagship vehicle, BC Partners is seeking €7 billion for its European Capital X, Permira Fund VI has a €6.5 billion target, Cinven’s sixth fund is set to close at around €6.5 billion in April, and Advent’s eighth vehicle is reportedly closing in on a final close above its $12 billion target.
“2016 is being led by the big fundraises in the market in Europe today,” Sinha said. “Because so many of the large-cap buyout [funds] and some of the bigger mid-cap buyout [funds] are out in the market right now, that’s what’s taking up most of the mindshare and timeshare of LPs today.”
A benign fundraising environment over the last few years resulted in an increase in spin-outs and first-time funds trying their luck on the fundraising trail last year. However, with limited LP resources going toward due diligence and meetings with larger managers, those at the smaller end of the spectrum, as well as first time teams, are having a hard time getting a hearing.
“With the volatility, the people to suffer are first-time fundraises as well as lower mid-market GPs whose fund sizes are €200-300 million or $500 million. Those are the ones suffering the most,” Sinha said. “The large guys are actually benefiting from the volatility.”
Macro-economic headwinds are also having an effect on the geographies with which LPs feel comfortable.
“Emerging markets is very difficult right now amongst LPs,” Sinha said. “LPs don’t want to put more capital towards China, they certainly don’t want to touch Latin America. The only market that’s still benefiting a little bit is India, but even then only the top quartile GPs, nobody else.”
At a breakfast briefing in London last week, Severin Brizay, head of M&A in EMEA at UBS, predicted the return of the multi-billion leveraged buyout such as those seen in 2006 as GPs come under further pressure to put dry powder to work. According to Bain & Co’s 2016 Global Private Equity Report, released last month, dry powder stands at a record $1.3 trillion.