Fundraising efforts picked up in the third quarter of year 2015, with over $48 billion of capital raising across 76 funds. Thus far through the year, the majority of capital raised has found itself in mega funds. Around $65 billion, or 46% of all capital raised, is in vehicles sized between $1 billion and $5 billion; $45 billion has landed in the largest fund bucket of $5B+. The amount of commitments flowing into mega funds makes sense, as a cadre of LPs—primarily public pensions— have been looking to reduce the amount of PE asset managers they work with, and mega-funds tend to perform well and are stable. In addition, as they cut down on affiliated GPs, they’ll naturally favor those who historically outperform, which could lead to a preponderant flow of commitments to only a handful of firms. Looking at funds by type, buyout funds raised significantly less capital in 3Q on a Quarter to Quarter basis, raising $24 billion, which represents a decline of 29% relative to 2Q. This was offset, however, by a 50% jump in capital raised specifically for energy vehicles. Energy firms spend heavily to conduct business, financing projects with heavy amounts of debt. As banks begin to reevaluate adequate lending bases to such companies, given the slump in oil prices, defaults are to be expected. PE funds have been earmarking increased amounts of capital in order to capitalize on emerging opportunities. Through the end of 3Q, oil & gas funds have raised an aggregate $33.9 billion, more than
any other entire year historically.
Restructuring and distressed debt funds also saw increased levels of commitments flow last quarter, jumping about 29% Quarter over Quarter to $4.2 billion. 2015 is not on pace to eclipse the $19B+ in capital raised for distressed debt vehicles in 2014, however the Quarter over Quarter surge is interesting when accounting for the recent slump in the high-yield market. Concerns about prospective liquidity in speculative-grade bonds have begun surfacing in the media, and an interest rate hike may cause a rush to the exit for high-yield investors, plunging the prices of those bonds. Defaults for risky issuers, especially in the oil sector, could cause a contagion across other sectors, and the uptick in debt fund capital could be a precursor to PE investors readying to acquire some of this debt if prices continue to drop. Median PE fund size thus far into 2015 dropped 2.9% Year over Year, yet median fund size for buyout funds has declined about 24.7%. This may be due to newer, more specialized vehicles coming to market, rather than diversified strategies that require more capital. As certain LPs look to shrink the amount of managers they work with, niche strategies seeking less capital could fare better when looking to lock in new commitments. 89% of vehicles that have come to market in 2015 have hit their target, about the same as 2014. In addition, funds in 2015 have been able to close in less time. Across all PE funds, time to close has come in at about 14 months, compared to nearly 18 months last year. This Information is brought to you from Pitch Book.
As a result of the record distribution levels seen in 2014, private equity fundraising in 2015 was robust, with 689 vehicles raising $288bn over the course of the year. While currently below 2014 levels, this number will increase as more data becomes available and it is likely that 2015 will be on a par with the total capital raised in 2014. The fundraising market is, however, more competitive than ever; there are currently 1,630 private equity funds on the road seeking $483bn. The gap is also widening between established fund managers and emerging managers; just 8% of the capital raised in 2015 was secured by new GPs and 54% of investors surveyed at the end of 2015 stated they would not consider investing in first-time funds over the next 12 months.
John Denes – CEO – REO Capital, LLC