Rationale: US Private Equity fundraising is on track to slow modestly in 2020, doubtlessly dampened by the pandemic, but we expect it to rebound next year, surpassing the $316.9 billion high-water mark set in 2019. Institutional investors—both in surveys and anecdotally—say they plan to increase their allocations to alternatives, of which PE is the largest chunk. A higher average allocation to PE means more investors will be looking to write larger checks. Fund managers have been happy to oblige in recent years; the median fund to hold a final close thus far in 2020 is about 50% larger than its predecessor, a trend we expect to continue next year.
In addition to raising larger funds, GPs are increasingly offering more strategies that fall under the PE umbrella. For example, in 2019 Blackstone launched its growth equity platform, a strategy that has seen increasing investor appetite by filling the void between traditional venture capital and leveraged buyouts.
Last, the boom in public equities witnessed since March 2020 is likely to be a boon for PE managers, through a mechanism known as the reverse denominator effect. When the value of other parts of an allocator’s portfolio grow in value, the commitments needed to maintain a target allocation to PE grow in lockstep. In November, the Federal Reserve affirmed its intention to continue its asset purchase program, which is likely to drive investors toward risk-on assets, including PE.
Prediction: First-time fundraising in the US will be the strongest since the Global Financial Crisis.
Rationale: First-time funds have struggled throughout the pandemic, putting up numbers similar to 2010. The lack of in-person due diligence has put PE firms without existing LP relationships at a disadvantage, making each incremental commitment multiple times harder than usual. LPs have been scrambling all through 2020 just to stand still, so adding a new GP has been lower on the priority list than it typically would be. However, many LPs are beginning to get their feet set under them as 2021 approaches. A pent-up demand for this product, with dozens of funds still in the market, is likely to lead to a healthy first-time fundraising environment.
The number of new PE firms may see a boost as well, adding to the number of GPs seeking to close a first-time fund. Other, more established PE firms are now seeing the prospect for future carry dim, whether it is through lower portfolio company valuations or extended exit timeframes. The prospect of a reduced payday may push current mid-level and junior executives to leave to start new firms.
Caveat: In-person due diligence will remain unlikely for much of the year. A delay in a COVID-19 vaccine could mean no in-person business meetings for the entire year, dimming prospects for first-time GPs. Further, a roaring public equity market may lift valuations in the private markets as well, boosting carry for these GPs and helping retain employees who otherwise may go launch a new fund.
REO Capital helps more First Time Funds that other Placement Agents in the Private Placement Markets. Contact us to find out what Funds we are bringing to the Market? www.reocapitalllc.com/call-us