In 2017 we have so far seen the largest private equity fund ever raised, the largest Asia-focused fund ever raised, and the largest Euro-denominated fund ever raised. However, by some key metrics what we are seeing is business as usual, according to private markets advisory business Hamilton Lane.
By two indicators – the average time between raises and the average jump in fund sizes in the same strategy – recent activity has not deviated from expectations, said Jim Strang, managing director and head of EMEA for the firm.
In simple terms, “the shorter the time between funds and the bigger the step up in fund size, the worse the outcome is”, said Strang, speaking at a breakfast briefing in London on Wednesday.
The average time between large buyout fundraises has been around four-and-a-half years. “We don’t feel bad about this,” said Strang. “When you look at it from a long-term average, it seems about right.”
The step up in size from one fund to the next is “far from the top” when compared with pre-crisis highs, said Strang. In other words, firms are no longer looking – on average – to raise twice as much money for a follow-on fund.
But as a measure of how frothy the market is, this has become “a little less relevant”, said Strang. “It doesn’t look like a top, but the only issue is that at the top [end of the size spectrum], firms aren’t raising bigger funds: they are raising more funds… a broader scope of opportunities. The causal relationship has broken down a bit.”
Examples of this trend include the various technology funds recently raised by the likes of Apax Partners, CVC Capital Partners and KKR to run alongside their flagship buyout funds; the long-term funds raised by Blackstone, Carlyle, CVC and others; regional-focused funds being raised by EQT, Permira; or EQT’s move into venture capital.
Where the fundraising market has deviated is the ease and speed with which funds are being raised.
The average time spent in market is falling and the number of funds holding a first and final close – a “one-and-done” – has increased dramatically. In 2013 and 2014, only 20 percent of funds were raised with just one close, whereas in 2016/17 the proportion is 43 percent.
“This is different,” said Strang. “It has never been like this.”
“Funds are coming in at the right size and are coming in the right funding pattern, but they are coming very fast, which is making people have to jump very quickly to be able to get in.”