As the Bard once wrote, it is a good divine that follows their own instructions. Private equity firms which in the past have espoused the value of self-restraint when it comes to fundraising and asset pricing are finding themselves at a crossroads when it comes to leading by example.
There was a time when raising $20 billion was an astonishing feat. In the past 18 months, three funds have closed on or above that figure: the €22 billion CVC Capital Partners VIII; $24.4 billion Hellman & Friedman Capital Partners X; and $20 billion Silver Lake Partners VI. There are more on the horizon, with Carlyle Group and Thoma Bravo both seeking $22 billion for their next respective flagship funds, and Blackstone reportedly set to seek up to $30 billion for its next flagship.
In today’s heady fundraising environment, fund targets – typically given as a measure of a firm’s discipline and ability to invest within the confines of their sweet spot and market opportunity – seem to count for less. Managers are increasingly opening their data rooms without communicating to prospective investors how much they plan to raise, The Wall Street Journal noted this week.
The enormous sums being raised add to an already staggering amount of unspent capital. The industry’s biggest listed alternatives firms alone have more than $550 billion to deploy, according to our estimates. More than one third of respondents in law firm Dechert’s 2022 Global Private Equity Outlook report said PE’s mountain of dry powder has led to fiercer competition and higher entry prices.
At a recent conference in Berlin, industry executives were reported to have expressed dismay at the prices at which PE firms are buying assets, with Apollo Global Management co-president Scott Kleinman saying record-low interest rates are causing “collective delusion” on deal valuations.
Kleinman’s comments reflect the worries of investors polled for the upcoming Private Equity International LP Perspectives 2022 Study – out in December – who rank extreme market valuations as having the greatest impact on performance over the next 12 months.
And yet, PE investors remain bullish on managers’ abilities to deliver returns. More than 90 percent of LPs expect the asset class to either meet or outperform benchmarks over the next 12 months, an 8-percentage point increase on when we conducted our survey last year. Institutions including Texas Municipal Retirement System, Abu Dhabi Investment Authority and Los Angeles City Employees’ Retirement System are among those increasing their PE exposure. The California Public Employees Retirement System, the US’s largest public pension plan, this week adopted an asset allocation mix that will hike its target PE exposure to 13 percent from 8 percent.
The pandemic has created challenges and opportunities for an industry already in upheaval on several fronts, with longer hold periods upending the way sponsors view their assets and ESG concerns increasingly being front of mind for investors. As our latest PEI LP Perspectives survey will show, PE is an industry backed by resilient capital. It will take discipline and a certain amount of collective common sense to ensure this dynamic continues.