Shadow fundraising drives capital flow into PE: study

Fund advisory Triago found that shadow commitments have risen faster than classic fund commitments, and are estimated to account for 26% of capital raised this year.

Shadow capital is fuelling record-high amounts of capital flowing into private equity, according to a quarterly report by fund advisory Triago.

Shadow capital, which is an umbrella term for co-investments, direct investments and separate accounts, used in private equity has increased faster than traditional fund capital. Triago found that shadow capital commitments jumped 90 percent to $127 billion last year from a peak amount in 2008, compared with classic fundraising’s $438 billion, which sits at one-fifth below the 2008 amount.

And of the $629 billion that Triago estimates will be raised this year in private equity, 26 percent, or $161 billion, will be from shadow capital, “an unprecedented amount and market share.”

Triago also expects $468 billion to be raised by traditional funds this year, marking the highest yearly amount after the record $557 billion in 2008. This depends on some momentum going toward the end of the year, the report said, because this quarter saw a slowdown from the previous quarters in 2015.

Overall, the first three quarters of this year saw classic funds raise $364 billion and shadow capital $121 billion, according to Triago estimates. The firm attributes high fundraising levels and shadow commitments to high distributions driven by strong realisations.

Fund managers distributed $392 billion from realised investments and dividend recaps to LPs into the third quarter this year, up from $359 billion in the same period of 2014. LPs received $138 billion net cash in this period, 12 percent lower than the $156 billion annual record from the same period last year.

And despite the expected decline in returns, Triago noted that there is an attractive environment for PE-backed purchases thanks to “reeling energy and commodity prices, a depressed euro, volatile stock markets and investor expectations of higher US interest rates.”