Global Private Equity Fundraising Turning Corner
Tuesday, October 05, 2010

While private equity fund raising remains slow, there was a small increase in funds raised in the third quarter of the year and the outlook for the sector in 2011 is looking brighter, according to research by Preqin, the alternative investment analysts.

Preqin's quarterly industry report shows that 81 private equity funds worldwide reached a final close in Q3 2010 raising an aggregate USD57bn, a small increase from the USD49bn raised in Q2 2010. Preqin would anticipate these figures rising slightly (10% - 20%) as further information becomes available.

While Preqin notes that the environment for fund raising remains "extremely challenging", it expects conditions to improve in the fourth quarter of the year and beyond.

Preqin outlined the following findings:

Funds primarily focusing on the US have raised the most capital during Q3 2010, with 37 funds raising a total of USD41.1bn. 21 primarily European focused funds raised an aggregate USD8.3bn, while 23 funds focusing primarily on Asia and the Rest of World region gathered a total of USD7.8bn.

Buyout funds raised the most capital, with 11 funds raising an aggregate USD20.4bn. This figure includes Blackstone Capital Partners VI, which closed on USD13.5bn in mid-July. Five distressed private equity funds raised an aggregate USD8.9bn. 19 private equity real estate funds closed with total commitments of USD8.8bn. Three infrastructure funds closed raising USD8.3bn while 20 venture funds held final closes totaling USD3.7bn.

After the number and aggregate fundraising target of funds in market fell consistently over the last year, Q4 2010 sees a small rise in both the number and value of funds being raised when compared to the previous quarter – possibly a sign of rising confidence among fund managers that conditions are starting to improve. There are currently 1,550 funds on the road seeking USD573bn worldwide.

For funds closed in 2010 the average time taken was 19.8 months, double the average time taken in 2004 – further evidence of the challenging nature of the fundraising market.

The increased time taken for funds to achieve a final close is leading to more funds holding multiple interim closes in order to put capital to work while continuing to attract new investments. 44% of funds currently raising have held an interim close, with these funds seeking an aggregate USD247bn. 13% of funds in market have now held two or more interim closes, meaning that they are likely to hold a final close within the next few months. This does indicate good momentum in the market and hints at possible improvement in the future.

While the number of funds achieving a final close has remained low, the LP (limited partnership) community is growing in confidence, and is planning to commit to more private equity funds in the future. In a survey of 100 conducted by Preqin in Q3 2010, 39% stated that they would be committing more capital in 2011 than 2010, with 49% committing the same levels, and only 12% intending to commit less.

LPs are mostly satisfied with how their private equity portfolios have performed, with 70% stating that private equity returns had met expectations. However, a significant 21% stated that returns had fallen short of expectations with only 9% seeing returns exceed expectations.

Tim Friedman, company spokesman, said:

“Although it is not yet coming through in the figures for fund final closes, we are seeing confidence in the asset class returning. Investors are increasingly enthusiastic about making new investments, partly as a result of increasing distributions coming their way, and also due to further improvement in existing fund portfolios as the industry continues to recover. Fund managers are responding, with some established names having launched new fundraising efforts in Q3 2010, and more planning to launch in the coming months."

"Although our figures show fundraising reaching a low point this year, much of the capital raised by funds achieving a final close in 2009 was actually committed prior to the financial downturn, with very little capital being committed in 2009 itself. We are now starting to see funds close which raised most or all of their capital post September 2008, showing that private equity investors remain confident towards the asset class and its ability to produce returns in the current financial climate."