Private Equity Fund Raising In Doldrums
Monday, July 05, 2010

The USD41.3bn collected by the global private equity industry from 82 final fund closes in Q2 2010 is the lowest total since 2003, and is a reflection of the continuing harsh fundraising conditions for managers seeking capital, according to new data from Preqin, the alternative investment research firm.

While Preqin said that it anticipates these figures rising slightly as further information becomes available, it suggests that the recovery in the fundraising market anticipated by many in the industry has yet to occur. However, a number of factors indicate that conditions are set to improve towards the end of this year and into 2011, according to Preqin.

Preqin's research found that:

Funds focusing on the US have raised the most capital during Q2 2010, with 46 funds raising a total of USD24.3bn. 19 European funds raised an aggregate USD8.0bn, while 17 funds focusing on Asia and the Rest of World region gathered a total of USD9.0bn.

Buyout funds raised the most capital, with 14 funds raising an aggregate USD13.9bn. Five infrastructure funds raised an aggregate USD6.1bn. 15 private equity real estate funds closed with total commitments of USD5.9bn. Venture funds were the most numerous, with 24 such funds closing with USD4.4bn.

The number and aggregate fundraising target of funds in the market have dropped considerably over the course of the last year, which is due primarily to a slowdown in new fundraising launches, plus an increase in the number of funds being abandoned or put on hold. There are currently 1,522 funds on the road seeking USD560bn worldwide, representing a significant drop from the 1,623 funds seeking USD889bn in Q1 2009.

Further evidence of the challenging nature of the fundraising market can be seen in the time it is taking for fund managers to close their vehicles. For funds closed in 2010 the average time taken was 19.8 months, double the average time taken in 2004.

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. The statistics show that 47% of funds currently raising money have held an interim close, with these funds seeking an aggregate USD265bn. 11% of funds in the market have now held three 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 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 June 2010, 65% of those polled indicated that they would next be making a commitment in H2 2010.

Over the next 12 months the majority of investors will be looking to maintain their allocations to private equity, with 19% looking to increase, and 6% looking to decrease their commitment levels. This indicates that for the majority of investors the level of new commitments that they will be making will be dependent upon the distributions that they receive from their existing investments and their need to recycle this capital in order to maintain their allocations. In the longer term over a third of investors are looking to increase allocations (36%) indicating that fundraising will be set to increase more substantially as we move into the second half of 2011.

Tim Friedman, a Preqin company spokesman, commented:

“Although institutional investors are growing in confidence following the recovery of private equity fund performance after the big drops we saw last year, fundraising remains an extremely challenging prospect. Preqin’s June 2010 LP survey shows that most investors (76%) are simply looking to maintain allocations in the next 12 months. While in previous years maintaining an allocation would require significant reinvestment of distributed capital from existing investments, the fact that distributions to investors have been so low means that investors have not had to invest in new funds at the same level in order to keep their allocations steady. With market conditions improving, the churn of capital is starting to pick up, and this will have a positive impact on new fundraisings as investors seek to reinvest distributed capital.

Another important factor to consider is that while there are still lots of funds on the road, and amongst them offerings from some top-quality managers, many of the brand-name and best-performing managers have delayed the launch of their next funds due to the current climate and the fact that they still have available capital from older vehicles. Now that deal-flow has started to pick up, there will be an increased need for a significant number of these big name fund managers to launch new offerings towards the end of this year and start of next year. It is therefore likely that we will see a real pick-up in activity as we move into 2011, helped by the plans of more than a third of investors to increase allocations in the longer term.”