On Tuesday Private Equity International revealed its proprietary ranking of the world's largest firms by capital raised in the last five years, with Blackstone, KKR and the Carlyle Group taking the top three spots.
As the private equity industry has evolved, however, new direct investors of private capital have emerged that don't fit into the LP-GP model. Assessing the firepower of these investors is not easy: some operate entirely outside of the public eye. Even those that are transparent about their programmes can slow down or speed up their investment pace in a way that a traditional general partner cannot.
Consulting firm Bain & Company estimates 'shadow capital' amounts to up to 20 percent on top of the estimated $1.5 trillion in dry powder as of the start of 2017. This would mean a potential pool of around $300 billion in search of deals. Much has been written about large LPs becoming direct investors, but who else is lurking in the shadows?
THE FAMILY OFFICE
Family offices have emerged not only as a growing source of limited partner capital, but also as direct investors. Some have scaled up to function like any other GP. Bregal Investments, for example, is a diverse group of seven private equity firms investing across Europe and the US in growth companies, mid-market companies and energy sector businesses. While some of the Bregal-branded firms raise third-party capital, most raise money from a single sponsor: Cofra Group, the Switzerland-based investment office established by the family behind the C&A clothing retailers, the Brenninkmeijers. Bregal Investments narrowly misses out on inclusion in this year's PEI 300 having raised $960 million from third-party limited partners in the last five years. Were we to count capital raised from its main sponsor, Bregal would sit in 103rd position with a total of $3.36 billion.
THE BALANCE SHEET INVESTOR
The UK's longest-running private equity firm, 3i, has not raised a commingled blind-pool private equity fund from third-party investors since it closed its €5 billion Eurofund V 11 years ago. However, since 2013, it has been making private equity investments using its balance sheet capital, bringing in co-investors when appropriate. The firm aims to invest up to £750 million ($958 million; €895 million) a year and since the start of 2017 has invested €320 million in two deals. Earlier this year its co-heads of private equity told PEI that the firm's balance sheet provides more than enough capital for the firm to fulfil its investment ambitions. Looking at the next two to three years, said Alan Giddins, “we clearly have more than enough capital to invest”.
When 3i came to sell portfolio company Mayborn Group last year, there was no shortage of interest in the process. The winner was Shanghai Jahwa, China's largest domestically owned manufacturer of personal care products and cosmetics. The exit represented a decent 3.6x return for 3i, but it also represented a wider trend: of increasingly active Chinese conglomerates in M&A processes. According to research by placement agent MVision and the London Business School, two-thirds of GPs said they had come up against a Chinese buyer in an auction process more frequently in 2016 than in previous years, while more than a quarter – 29 percent – had lost out to a Chinese bidder in an auction process.
One organisation has the potential to cut a swathe through the PEI 300, and it is not a private equity firm. Japanese technology giant SoftBank is in advanced stages of raising a $100 billion technology-focused fund from, it appears, a relatively small number of limited partners. Assuming it fulfils the necessary criteria for inclusion in the ranking, SoftBank is likely to top next year's list by a margin of tens of billions.