Private Equity Predictions in 2018

Private Equity Fundraising Hits a New Record

With some $621 billion raised for private equity funds last year, 2017 finally surpassed the longstanding fundraising record of 2008, when $557 billion, was raised across all Private Equity strategies and regions, according to the estimates of Triago, the fund advisory firm. This year should set a new annual fundraising record of $750 billion, based on calculations of rising allocations to Private Equity from existing investors and estimates of fresh capital from new investors. A particularly slow upward march of interest rates and private equity’s credible promise of double-digit annual returns is fueling ever-greater investor allocations to PE. Incidentally, this fundraising estimate does not include the tens of billions that Norway’s $1.1 trillion Government Pension Fund Global, the world’s largest sovereign wealth fund and potentially this year’s most significant new PE investor may shortly decide to invest in the asset category.

Larger and Larger Funds are Raised

Private equity fund size records are being quickly achieved only to be quickly broken. Last year saw Apollo close the largest buyout fund ever at $24.7 billion and KKR gather $13.9 billion for the biggest ever North American PE pool. Silver Lake raised $15 billion, briefly an unprecedented sum for a technology-focused vehicle, only to be surpassed by SoftBank’s $98 billion Vision Fund, the largest tech pool and the biggest PE fund ever – four times the size of the Apollo fund. Investors are limiting relationships to make portfolios manageable and doubling down on managers they trust. Whenever they can, they’re also investing more in one go, keeping liquid, low yielding investments to a minimum. In a recent investor survey 50 percent of investors and managers said that managers would shortly raise a significant number of $30 billion-plus PE funds. Moreover, 56 percent believe that in the next three-to-five years the $98 billion Vision Fund will be surpassed.

Alternative PE Funds Emerge as a Source of Alpha

In the last six years, average private equity fund size has nearly doubled to $1.3 billion. Yet larger mainstream funds competing against each other are having a tougher time producing the kind of outsize returns for which Private Equity – historically characterized by smaller funds and inefficient markets – is celebrated. There is mounting evidence that sector-focused PE funds and emerging managers, those raising their first or second fund, outperform the typical later-generation mainstream fund. The result is a growing willingness on the part of investors to invest in specialists and emerging managers – what Palico, the online marketplace I founded six years ago dubs alternative PE – even as overall average fund size gets bigger. A barbell investing style will take firm root in 2018, with limited partners putting large sums to work in big funds, but seeking a bigger bang for their buck by investing smaller sums in alternative Private Equity.

Private Debt Funds Continue Their Rise

In the five years through this past June, the assets managed by private debt funds tripled in size to $475 billion. The funds have offered limited partners low double-digit annual returns with minimal risk during a period of historically subdued interest rates. Global liquidity is now at an unprecedented level – even as benchmark interest rates slowly rise – and the typical annual return of private debt funds is down to the high single-digits. Yet that return is still well above what’s available in credit markets of similar risk profile. This makes the continued growth of private debt funds a virtual certainty in 2018. Looking to 2018 and beyond, when PE managers expand product ranges, it’s more than likely that they’ll do so through a private debt fund. Analysis of creditworthiness neatly complements equity analysis, and extending debt to the same types of companies in which managers invest, keeps PE firms within marketable specialties. Credit provision equally offers insight. In an increasingly competitive market, that edge is often critical for profitable equity investment.

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