Private Equity Funds Raise Nearly $600 Billion in 2019

Real estate fundraising tops $150 billion while private debt activity slows.

Private equity funds that closed in 2019 raised almost $595 billion, the fourth straight year it surpassed half a trillion dollars, and the third-highest total on record, according to Preqin. The financial data and information provider also reported that real estate fundraising exceeded $150 billion for the first time in 2019, and private debt activity slowed sharply during the year.

Despite declining slightly from the previous year, private equity deal-making was strong in 2019 with $393 billion in buyout deals and $224 billion in venture capital deals. That compared with $493 billion and $271 billion, respectively, in 2018. This was aided in part by better valuations that saw the average buyout deal size hit $490 million – the highest in a decade.  

“Fundraising and deal-making activity both remained strong, and investor sentiment is positive, with many institutions looking to increase their private capital investments in the face of a potential downturn,” Christopher Elvin, head of private equity, said in a release. “But it is not without its challenges: Intense competition for deals has pushed the average buyout investment to a size not seen since the Global Financial Crisis, and future returns may suffer as a result.”

Preqin said the impact of high valuations on future performance has weighed heavily on fund managers, many who have been decelerating their deal making to avoid overpaying for acquisitions. Because of this, dry powder – the amount of cash reserves or liquid assets available for use – has continued to grow, reaching a new high of $1.43 trillion at the end of 2019.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

As for private debt, fundraising lagged in 2019 with only 152 funds closing after four straight years of more than 200 private debt funds closing each year. The funds also secured a combined $107 billion, which was an 11% decline from the previous year, and the lowest annual total since 2015. Because of the lower fundraising totals, dry powder has fallen to $261 billion at the end of 2019 from $292 billion at the end of 2018 year later.  

“Private debt has been the expansion story of the past decade, but the shine has worn off this narrative in 2019,” said Tom Carr, Preqin’s head of private debt.  “Suggestions that the market has reached saturation are not fully substantiated, but many investors do seem to be holding off on making commitments, and fundraising has seen its largest ever year-on-year decline.”

Despite the difficulties, fund managers have continued to launch new vehicles, and the private debt fundraising marketplace is more crowded than ever. At the beginning of 2020 there are 436 funds seeking a total of $192 billion from investors, compared with 399 funds that sought $168 billion a year ago. Preqin added, however, that unless fundraising rebounds significantly in 2020, many of those funds will struggle to raise capital.

“But long-term appetite among investors remains robust, and fund managers certainly believe that there is significant potential yet to be tapped,” added Carr. “They will point to declining dry powder as an indication that they are still able to put capital to work, and this may prompt investors to start making commitments again and boosting 2020 fundraising activity.”

Meanwhile, annual real estate fundraising surpassed $150 billion for the first time last year, as funds that closed in 2019 secured a combined $151 billion. Although large amounts of capital were raised, the number of vehicles reaching a final close declined sharply last year to only 295 funds. Preqin said this means funds are getting larger with the average size of funds reaching $625 million. At the start of 2020, there are 918 real estate vehicles seeking a total of $281 billion from investors.

“Real estate fundraising hit a new high in 2019, surpassing the high-water mark of $148 billion set in 2008,” said Justin Hall, Preqin’s head of real estate.  “Concerns of a potential market slowdown have led investors to commit more capital to alternative assets, and real estate has benefited from a huge influx of capital in the past five years.”

Hall said the sharp drop in the number of funds closed shows how unevenly that capital is distributed with concentration among the largest fund managers at a record high. “The overall success of the market does not mean that first-time or smaller fund managers can expect to meet with easy success when they bring new vehicles to market in 2020.”

Related Stories:

Private Equity Surges in Southeast Asia

Denmark Fund Restructures, Merging Private Debt and Alts Units

CalPERS Commits More than $3 Billion to Real Estate

Tags: , , ,

Pension Plans Will Boost Hedge Fund Investments in 2020, Study Says

Dismay over low-yielding fixed income will cause shift, industry research group Agecroft Partners predicts.

Pension funds will increase their allocations to hedge funds in 2020, due to lower interest rates and credit spreads, according to Don Steinbrugge, CEO of hedge fund consulting firm Agecroft Partners and a renowned expert in the industry.

Part of Agecroft’s trend predictions for the new year, the pension projection rests on the entirely reasonable notion that fund chiefs will want to lower their exposure to fixed income.

Public funds, which various research findings say invest about 5% of their assets or less into hedge funds, have an actuarial rate of return assumption of 7.5%. With 10-year Treasury notes yielding less than 2% and all but the riskiest junk bonds exceeding 7.5%, the large amount devoted to bonds (around 40%, by State Street Global Advisors’ count) looks increasingly ill-advised.

“With the yield on the aggregate bond index in the mid- 2% range, the bar is low for hedge funds to add value on a risk adjusted return basis,” Steinbrugge wrote in the report. He suggested that pension plans might choose among a range of different hedge strategies to place their rerouted money, including distressed debit, specialty financing, structured credit, and relative value fixed income.

In performance terms, the hedge fund industry has faced rough going in recent years. But at least 2019 was decent, albeit not overwhelming. Hedge Fund Research’s Asset Weighted Composite index rose 7.7% in the 12 months ended December 31, versus a 0.7% dip in 2018. Note that investing in an S&P 500 index fund, which costs a lot less than a hedge fund, would have gained nearly 30% last year. To be sure, hedge fund fans point out that the purpose of this asset class is not to beat the market, but to provide diversification and downside protection during bearish times.

Despite moves by giants like California Public Employees’ Retirement System and New Jersey’s State Investment Council to trim their hedge fund exposure, there has been a growing movement to adopt this asset class, especially among institutional investors. Steinbrugge predicted that this movement will continue. “Hedge fund industry assets under management will grow for the 11th time in 12 years in 2020,” he stated.

For more stories like this, sign up for the CIO Alert newsletter.

Other trends Agecroft’s report highlighted include a slight decline in revenue owing to lower fees. The traditional arrangement—of a 2% yearly management fee and 20% of any profit—has come under fire. Meanwhile, he noted, the number of hedge funds will continue to drop, which means the top 5% of the industry, in investors’ estimations, will benefit the most from this shrinkage. Steinbrugge has long complained that marginal players are dragging down the overall industry performance.

 

Related Stories:

More Hedge Funds Close in 2019 than Opened

Hedge Funds Are Leveraging Alternative Data In An Effort To Transform The Industry

Sure, Hedge Funds Are Charging Less, but There’s a Catch

 

 

 

 

 

 

Tags: , , , ,

«