Private equity is continuing its strong performance in terms of fundraising. The latest data shows that despite deal-making slowing down, fundraising activity is breaking records – the future is set open for big deals.
North American funds making gains
Preqin’s latest research into the first quarter has highlighted strong fundraising efforts, especially by North America-focused funds. These funds secured $62 billion, which is a record-breaking amount. In Asia, funds were able to raise $13 billion. On the other hand, Europe-focused funds saw fortunes decline. In 2016, funds amassed $33 billion in Q1 but the first quarter of 2017 only saw them raise $12 billion.
Even worldwide fundraising achieved its best quarter since the start of the financial crisis. 253 global capital funds amassed $156 billion. In terms of global private equity vehicles, there were 175 of them gathering $89 billion in investment commitments.
However, Livemint reported that the figure might increase by 10%. Preqin is still gathering and counting in some of the data. If the fundraising for Q1 increases by that much, it would cross the all-time high of $105 billion in the same quarter in 2008.
In terms of funds, eyes are currently turned to Apollo Global Management. The firm is hoping to raise $23 billion with its fund. It’s being advertised to investors and it could close next month, according to CNBC sources. If all goes according to plan, Apollo’s fund would become the largest private equity fund, overtaking Blackstone’s 2007 fund. Blackstone was able to fundraise $22 billion with its fund.
Private equity dry powder is also at high levels. The available capital raised from $821 billion at the end of 2016 to $842 billion during Q1.
Performance supporting growth
The strong figures in fundraising are down to the good fund performance. According to Cambridge Associates index of private equity returns, funds were posting gains of 8.5% in the year 2016 through September. While this falls short of the gains available in any public stock index, the long-term performance helps boost private equity fund performance.
If you look at the long-term figures, private equity outperforms benchmarks. The funds get close to 11% returns over a period of a decade. This is much better than public markets, which tend to decline in the long run.
Christopher Elvin, head of private equity products at Preqin, said in the report, “2017 may ultimately come to be a record fundraising year for the industry”. However, the report also warned about the dangers lurking in – mainly the possibility of a two-tier fundraising system. Under this, big firms would continue to create huge funds, leaving smaller private equity firms to fight for scraps.
In addition, the problem for funds is to manage the expectations of investors with the urge to spend the raised capital. A large amount of available capital in the sector could continue to drive up prices – this can lead to overvaluation and therefore, decline the returns. Valuations in public market have continued to increase, but so have interest rates in many parts of the world.