PRIVATE equity (PE) firms that set out to
raise new funds in 2015 encountered some of the best conditions they had
seen in years.
For a fifth consecutive year, cash distributions from exits ran well ahead of calls on previous commitments for limited partners (LPs), meaning abundant fresh capital enabled most general partners (GPs) to hit or exceed their fundraising targets.
As we discuss in Bain & Company’s Global Private Equity Report 2016, successive years of strong cash distributions supported LPs’ capacity to plow capital back into PE across every region of the world in 2015. GPs offering funds of all types and across all regions shared broadly in fund-raising success. Funds are closing faster, and the share of those that hit or exceeded their goal was higher in 2015 than at any time since the pre-crisis boom of 2007.
Top-performing GPs reap a whirlwind of new financing. With LPs flocking to them in droves, high-flying GPs whose predecessor funds performed in the top quartile have been beating their fundraising targets by a wider margin and in less time over the past six years. Indeed, LPs’ appetites for big, top-performing funds vastly exceed the supply of PE funds available to absorb all the capital LPs need to deploy.
The net cash flowing to LPs since 2010 has exceeded $300bn — equal to more than one-and-a-half years’ worth of fundraising.
The spillover effect floats all GPs’ fundraising boats. The effect of much capital looking to be put to work is distorting the overall fundraising environment, and its benefits are flowing well beyond the big, favoured GPs.
New PE fund offerings of all sizes are absorbing the spillover of LPs’ capital allocations that are unable to find a home with a top performer (see figure). Even GPs whose prior funds were third- or fourth-quartile performers exceeded or came close to hitting their fund-raising targets. In 2009, sponsors of fourth-quartile funds were able to bring in just two-thirds of their new fund-raising targets; in 2015, they surpassed their goals.
Big GPs enjoy natural advantages. The biggest and best-performing funds clearly enjoy the pole position in the race for a large tranche of this capital. Bigger is better when it comes to producing steadier results, because the variation in returns between the top and bottom performers is reduced. PE funds exceeding $3bn are apt to hold more and larger companies, so they are more likely to produce steadier results than their smaller counterparts. For the large number of LPs increasingly looking for low-cost access to PE-level returns, these larger funds provide the best option.
With LPs so flush with capital to reinvest, fund size even favours big PE firms whose predecessor funds have underperformed in the past. While the firms with first- or second-quartile predecessor funds easily met or exceeded their fund-raising targets when they brought new funds (of every size) to market, so did the largest new funds marketed by firms whose prior funds fell to the bottom quartile. Yet, even as the largest PE firms lift their fund-raising targets and roll out new offerings to accommodate the surge in LP allocations, Bain experience suggests that, absent an unlikely return to the megadeals of the pre-crash PE cycle, there may be a ceiling on just how big individual funds can become — capped somewhere between $16bn and $18bn in the years since 2009. LPs may want GPs to grant them larger allocations to invest in attractive funds, but they also want the GPs they work with to keep the size of their fund to a manageable limit.
LPs still see a lot to like in smaller PE funds. That fund-size ceiling helps explain why small PE funds have continued to garner a large proportion of new funds raised globally in recent years. Smaller funds remain popular in large measure because PE fundamentally remains an entrepreneurial business. More than ever, a sizeable subset of LPs want to sign up with GPs that can identify promising pockets of opportunity and demonstrate that they can deliver top-quartile results. Many of these focused LP investors have clear targets for how they want to allocate their money, and they are willing to back smaller or new GPs that offer funds matching the specific risk and sector exposure they are looking for.
However, as we will see in forthcoming instalments of this series, the high tide of capital that helped float nearly all new funds last year is ebbing and will give way over the next year or two to a more competitive scramble to win the backing of LPs.
• This is the sixth part in a series based on Bain & Company’s Global Private Equity Report 2016.
• MacArthur and Elton are leaders of Bain & Company’s Private Equity Group. Vorobyov is a Bain & Company partner based in Johannesburg, where he leads Africa’s Private Equity and M&A Practices.
For a fifth consecutive year, cash distributions from exits ran well ahead of calls on previous commitments for limited partners (LPs), meaning abundant fresh capital enabled most general partners (GPs) to hit or exceed their fundraising targets.
As we discuss in Bain & Company’s Global Private Equity Report 2016, successive years of strong cash distributions supported LPs’ capacity to plow capital back into PE across every region of the world in 2015. GPs offering funds of all types and across all regions shared broadly in fund-raising success. Funds are closing faster, and the share of those that hit or exceeded their goal was higher in 2015 than at any time since the pre-crisis boom of 2007.
Top-performing GPs reap a whirlwind of new financing. With LPs flocking to them in droves, high-flying GPs whose predecessor funds performed in the top quartile have been beating their fundraising targets by a wider margin and in less time over the past six years. Indeed, LPs’ appetites for big, top-performing funds vastly exceed the supply of PE funds available to absorb all the capital LPs need to deploy.
The net cash flowing to LPs since 2010 has exceeded $300bn — equal to more than one-and-a-half years’ worth of fundraising.
The spillover effect floats all GPs’ fundraising boats. The effect of much capital looking to be put to work is distorting the overall fundraising environment, and its benefits are flowing well beyond the big, favoured GPs.
New PE fund offerings of all sizes are absorbing the spillover of LPs’ capital allocations that are unable to find a home with a top performer (see figure). Even GPs whose prior funds were third- or fourth-quartile performers exceeded or came close to hitting their fund-raising targets. In 2009, sponsors of fourth-quartile funds were able to bring in just two-thirds of their new fund-raising targets; in 2015, they surpassed their goals.
Big GPs enjoy natural advantages. The biggest and best-performing funds clearly enjoy the pole position in the race for a large tranche of this capital. Bigger is better when it comes to producing steadier results, because the variation in returns between the top and bottom performers is reduced. PE funds exceeding $3bn are apt to hold more and larger companies, so they are more likely to produce steadier results than their smaller counterparts. For the large number of LPs increasingly looking for low-cost access to PE-level returns, these larger funds provide the best option.
With LPs so flush with capital to reinvest, fund size even favours big PE firms whose predecessor funds have underperformed in the past. While the firms with first- or second-quartile predecessor funds easily met or exceeded their fund-raising targets when they brought new funds (of every size) to market, so did the largest new funds marketed by firms whose prior funds fell to the bottom quartile. Yet, even as the largest PE firms lift their fund-raising targets and roll out new offerings to accommodate the surge in LP allocations, Bain experience suggests that, absent an unlikely return to the megadeals of the pre-crash PE cycle, there may be a ceiling on just how big individual funds can become — capped somewhere between $16bn and $18bn in the years since 2009. LPs may want GPs to grant them larger allocations to invest in attractive funds, but they also want the GPs they work with to keep the size of their fund to a manageable limit.
LPs still see a lot to like in smaller PE funds. That fund-size ceiling helps explain why small PE funds have continued to garner a large proportion of new funds raised globally in recent years. Smaller funds remain popular in large measure because PE fundamentally remains an entrepreneurial business. More than ever, a sizeable subset of LPs want to sign up with GPs that can identify promising pockets of opportunity and demonstrate that they can deliver top-quartile results. Many of these focused LP investors have clear targets for how they want to allocate their money, and they are willing to back smaller or new GPs that offer funds matching the specific risk and sector exposure they are looking for.
However, as we will see in forthcoming instalments of this series, the high tide of capital that helped float nearly all new funds last year is ebbing and will give way over the next year or two to a more competitive scramble to win the backing of LPs.
• This is the sixth part in a series based on Bain & Company’s Global Private Equity Report 2016.
• MacArthur and Elton are leaders of Bain & Company’s Private Equity Group. Vorobyov is a Bain & Company partner based in Johannesburg, where he leads Africa’s Private Equity and M&A Practices.
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