The fundamental growth of an asset class

Dramatic shifts at the top of the PEI 300 only tell us half the private equity story.

We published our inaugural general partner ranking, the PEI 50, in 2007, aiming to create “a useful point of reference in a changing and expanding industry”.

Each annual list offers a snapshot of a point in time, with the challenges and hurdles the industry has faced over the last 12 years reflected in the ebb and flow of the ranking.

The firms occupying the top 10 spots justifiably garner the most headlines. After all there have been some spectacular rises – and falls – over the last decade.

Take the global financial crisis, for example. Because of the way the PEI 300 is calculated – based on capital raised in the previous five years – the full effect of the GFC showed in 2014 when the pre-2009 mega-funds dropped out of consideration. Unsurprisingly, then, 2014 was a low point for the top end of the ranking and the amount needed to break into the top 10 dropped more than 30 percent from the previous year.

Clearly mega-funds were a tough sell in the years immediately after the financial crisis. The rolling fundraising totals of the largest firms suggest an industry susceptible to market shocks.

But a look at the other end of the PEI 300 tells a different story. To make it into our 2009 ranking, when we first expanded from 50 to 300, a firm had to have raised $823 million over five years (it was Thoma Bravo at 300, in case you were wondering). That minimum entry requirement has risen steadily over the years. The post-crisis slump barely registered, and to make it onto this year’s list, the minimum fundraising total was just over $1 billion (congratulations to Beijing-based wealth management firm CreditEase).

What does that tell us? Not that it’s easier to raise a mid-market fund when times are hard – of the 50 firms at the lower end of our 2009 table, only 14 appear anywhere in the 2018 version – but that the pool of institutional-grade managers is getting deeper. Data cited by Bain & Company in its latest Global Private Equity Report show the number of active private equity firms has risen steadily since 1990 – even through the crisis – and now totals 7,775. This is nudging up the amount needed to enter the PEI 300 as the base of the private equity pyramid widens.

So where are we now? The last 12 months has been a fundraising bonanza and those in the upper echelons have been raking in capital. The total needed to break into this year’s top 10 – $25.9 billion (TPG) – was $6 billion more than a year ago. Records have been broken across the board in our 2018 ranking, with more capital raised by the top 10 ($394 billion), the top 50 ($876 billion) and the whole 300 ($1.49 trillion) than ever before.

There is a pervasive narrative in PE that capital is consolidating among the largest managers. The data support this to a point: the top 10 accounted for 26.5 percent of the total capital raised, up from 23.8 percent last year. But our ranking shows that growth at the top is not at the expense of the rest of the market.