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Going into 2019, expectations for private equity fundraising were modest so what can we   expect?

Q2 2019 – Private Equity Fundraising Outlook

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INTRODUCTION

For many years, private equity has delivered stellar returns, driving strong investor commitment to the asset class. According to Preqin, in the ten years to June 2018, the private equity industry has outperformed the S&P 500 index, returning 10.8% compared to 10.2% for the public market index. Such performance no doubt is a major contributor to the 90% of investors reporting to Preqin that their private equity investments have met or exceeded their expectations in the last 12 months.

The question now is what can we expect for private equity fundraising in Q2 2019 and beyond?

EXPECTATIONS FOR 2019

Going into 2019, expectations for private equity fundraising for the forthcoming year were modest. Among other factors, the Q4 2018 stock market volatility and expectations for an inevitable economic slowdown contributed to a mindset at the end of 2018 that private equity fundraising would show a sizable decline in 2019, though private equity would continue to remain an important part of investors’ portfolios. On this theme, Preqin reported that while private equity fundraising has been very strong over the past five years, high pricing is putting pressure on future returns, causing distributions to slow, which has led some managers to lower their expectations for targeted returns.

CONTINUED STRENGTH

Despite the concerns expressed as we headed into 2019, private equity fundraising in the first quarter of 2019 clearly showed signs of continued strength. According to PitchBook, fundraising is on pace to reach $182 billion in 2019, approximating the $180.7 billion raised for all of 2018. Such strength has been driven by an extraordinarily larger average fund size (despite a smaller number of funds) – the average private equity fund raised in Q1 2019 was $1.7 billion, a whopping 70% higher than the average for 2018.

Firms contributing to such noteworthy data points include Thoma Bravo, which raised $12.6 billion for its 13th flagship fund. Also, Genstar closed its ninth flagship fund in February, with $7.0 billion of capital raised, much larger than the $3.95 billion fund it raised in 2017. Moreover, 2019 should see additional megafunds ($10 billion or more) come to market, with Blackstone recently conducting a reported $22 billion first close on its latest flagship fund.

And traditional buyout funds are not the only ones enjoying fundraising success. According to Private Equity International (PEI), growth equity strategies have gotten off to their best start to the year for fundraising since at least before the global financial crisis, with firms raising $24.9 billion across 23 growth equity funds. Summit Partners raised $4.9 billion for its Growth Equity Fund X, the largest fund in this category and the fourth-biggest of any strategy that quarter. Investor demand for growth equity strategies is driven at least in part by the fact that high-growth companies are staying private longer and the companies need capital to fuel their growth. As a result, according to a PEI survey, almost one-third of investors polled intend to increase their target allocation to the strategy over the next 12 months.

CONCLUSION

Despite the large private equity commitments made in recent years and concerns expressed going into the new year, 2019 may hold more of the same for fundraising for this asset class. We should expect to continue to see mega-fund offerings, which will drive the total amount of capital raised, though the actual number of funds raised may show a sizable decline. In addition, the ongoing rise of co-investment vehicles may also support overall fundraising. Furthermore, strategies such as growth equity investing should help maintain investor interest in the broader private equity model. As always, caution is warranted, as macroeconomic and political concerns are ever-present.

The bottom line is that as long as private equity outperforms other asset classes, investor interest will continue without pause.


Engaging Alternatives - Q2 2019

Anthony Minnefor is an Audit Partner with experience in the alternative investment industry who leads engagement teams on audits of private equity and venture capital funds and funds of funds.

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