Larger funds, specialization big fundraising trends for 2019

Here is the private equity fundraising market as 2018 comes to a close: Managers are coming back earlier than expected and doubling or tripling fund sizes beyond what they’ve raised in the past.

Limited partners are more than happy to pour money into their most-favored managers, enabling them to raise much more money than before. This is in the form of larger funds, but also in new products that focus on different strategies.

LPs have expressed concern about fund-size jumps, and lack of hard, crystallized performance numbers in funds that have yet to sell anything.

And yet the money keeps flowing.

Logical conclusion

“If you have the opportunity to raise the fund and do a dry close and plan to invest the money next year, and you have an LP base that’s very loyal and excited about what you’re doing, then it seems logical from a lot of GPs to take that risk now,” said John Haggerty, director of private markets investments at Meketa Investment Group.

“There’s a lot more demand than supply for proven, solid PE practitioners,” Haggerty said.

Hard data seems to indicate fundraising has slowed a bit since 2017, though final numbers won’t be available until next year.

Last year’s tally also got a boost from the historic fundraising by Softbank, which collected about $93 billion for its Vision fund.

U.S. private equity managers raised $135.8 billion over the first three quarters of the year, down 22 percent from $174.9 billion during the same time in 2017, according to Buyouts research.

The year “2018 appears to be more in line with 2013-2016 fundraising amounts,” an institutional-investor consultant said. “However, 2018 is on pace to be a record year from a deployment-of-capital perspective.”

The dynamic created by the strong fundraising market — namely managers coming back early — may be leading to the slower fundraising pace this year, sources said. In other words, many managers hit the market last year, they said.

“There’s a lot of firms that would normally be back in 2018 that forced it on 2017,” Haggerty said.

Specializing

Specialist managers are increasingly popular in this market, especially in areas like tech and healthcare, sources said. The risk to LPs is that a sector that a fund solely focuses on goes through a correction.

Tech funds raised about $6.6 billion through the third quarter, while healthcare-focused pools collected $6.25 billion, Buyouts research said.

“Go back 10 or 15 years … and almost every manager was a generalist. Today, you have the opportunity to construct your own portfolio across industries,” Christian Kallen, managing director at Hamilton Lane, said. “Each industry has a meaningful number of industry specialists.”

The trend toward greater sector specialization is partly driven by LPs looking for greater exposure to specific industries, Kallen said.

Specialist managers expected back next year include Aquiline Capital Partners, focused on financial services, industrials-focused American Industrial Partners and software-focused Mainsail Partners.

First-timers

Another strategy that has remained popular in the strong fundraising market is newer managers, including first-time funds.

“As we face this supply/demand imbalance, if you are willing to work with newer managers who are less proven and do additional research that’s required to make those investments, you may be rewarded with strategy and team that’s hungry and participating in a less efficient part of the market,” Haggerty said.

Despite its popularity, fundraising for first-timers and emerging managers in general has slowed, a result of more established managers coming back to market early and often and taking up LPs’ allocation space, sources said.

“Most GPs are coming back at scale and speed challenging the residual capital typically allocated to emerging managers,” the LP consultant said. “While it has squeezed informal emerging manager dollars, capital formally allocated to emerging manager programs or SMAs typically see an increase during bull markets.

“If you’re a spinout with team cohesion, formal track record attribution and performance to back it up, you’re typically raising smaller dollars on a relative basis and able to raise much faster than in a bear market. This dynamic has given rise to more spinouts in recent years than you’d typically see.”

As of July, 142 first-time funds raised $19.1 billion, according to data provider Preqin. Last year, 372 first-time funds raised $48.1 billion, down from $49.6 billion across 423 funds in 2016, Preqin said.

First-timers in the market next year include Sole Source Capital, expected to target $150 million for its debut fund; Saroras Private Capital with a potential target of $600 million and Peloton Capital Management, targeting C$400 million to C$600 million.

 

Additional Data

Buyouts’ 2018 list of most-talked about emerging firms (figures as of November 2018)

Buyouts’ list of candidates to come back to market in 2019