Private Equity – The Sleeping Giant

March 2, 2016

In recent months public market volatility has dominated investor discourse, as capital has fled from riskier assets and investors have sought safe havens. Private equity continues to quietly grow, however. Year end statistics from Preqin state that private capital assets grew by close to 5% during the six months since December 2014 and stood at $4.2 trn as of June 2015 (a record). Dry powder levels also rose during the same period, and stood at $1.34 trn as of the same date, while unrealized portfolio value accounted for the balance of $2.82 trn. New funds raised in 2015 surpassed $500 bn for the third consecutive year, although this capital was concentrated among fewer funds. All fund types saw an increase in unrealized value, (particularly direct lending and growth funds, which were of most interest in the past year) with the exception of real estate funds, which fell slightly over the six month period. This reflects the longer average lifespan of many funds, as GPs struggle to exit investments in older funds, while the large amount of dry powder indicates a meaningful capital overhang, which indicates managers could be looking at more competitive deal environments and less appealing pricing.

Spin out funds remain popular, but as we have noted before, the fund landscape is increasingly bifurcated as larger funds with established track records have shorter capital raise periods and generally more success, while emerging funds tend to have to scrape by with small incremental capital raises and significantly longer in the market. North America has been the dominant region for fund raising, attracting the most capital commitments, while European fund raising was also stronger than in 2014 (the Asia-Pacific region saw a drop in funds raised, however, reflecting a fall in interest in China focused funds. In other regions, private capital raised in Africa reached a record high of close to $6 bn while investor interest in Latin America was notably lower, with regional fundraising dropping to $5.9 bn, its lowest level since 2009.

Secondary fund activity was generally robust with the average discount to NAV of funds sold only 8%, while the year also saw the sale of 80 funds by CalPERS in Q4 2015, of the the largest secondary transactions ever. Over $19 bn in capital was raised by 10 secondaries funds in 2015.