Fundraising and Capital Overhang

Transcription

1 Sponsored by: 2H 2013 Private Equity Fundraising and Capital Overhang Report In this Report: Page 4: Capital raised hits highest level in more than 4 years in 2Q. Page 6: Average fund size continues to climb. Page 7: Number of first-time PE funds dwindling from 103 in 2007 to 17 in Page 10: Firms wait longer between funds, spend less time on road in 12 and 1H Page 10: Capital overhang continues slow decline from 2008 peak of $473.7 billion to $328.4 billion in 2012.

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3 Table of Contents Introduction Overview Fund Size & LP Commitments Fund Step-Up Closing Time & Time Between Dry Powder Credits & Contact Data, Inc. John Gabbert - Founder, CEO Adley Bowden - Research Director Content James Gelfer - Editor Allen Wagner - Editorial Associate Design Allen Wagner - Editorial Associate James Gelfer - Editor Plante Moran is among the nation's largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting and wealth management services. The transaction support team offers you the agility necessary to find a deal and close it, while mitigating risk and ensuring a healthy return on investment. The Private Equity team works with both funds and their portfolio companies providing audit, tax and consulting services. The firm has a team of more than 2,000 professionals in 21 offices including Mexico, India and China. We have professionals with deep industry expertise in manufacturing; automotive, plastics, metals, distribution, real estate & construction, technology software, franchise, hospitality, insurance, financial services, and healthcare. To learn more visit: peg.plantemoran.com. Editing & Data Analysis Ynna Carino - Editor Peter Fogel - Data Analyst Contact Editorial - editorial@pitchbook.com Sales - sales@pitchbook.com Definitions & Methodology Fundraising: For this report, only U.S.-based funds that have held a final close are included in the totals. The following fund types are included: buyout, growth, co-investment, mezzanine and energy. Vintage Year: The vintage year as reported by the fund GP and LPs, or the year in which a fund holds its final close. Capital Overhang: The capital overhang is calculated using the most recently available fund returns information, which for this report is through Dec. 31, COPYRIGHT 2013 by Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. 3

4 Introduction Virtually all aspects of the private equity (PE) industry from deal-sourcing and structuring transactions to managing portfolio companies and exiting investments have undergone seismic changes since the financial crisis. But perhaps the most important developments have been in the realm of fundraising, as the ability to procure commitments from limited partners (LPs) plays a fundamental role in how firms invest and operate. To that end, the number of funds raised annually has been cut in half from the height of the financial crisis, fewer new PE firms are being launched and it seems like every day there are stories of another GP closing their doors. And for the firms that have weathered the storm, the fight to procure commitments from LPs has never been more competitive. Through the first half of 2013, PE firms have closed just 59 U.S.-based funds, setting a pace for one of the slowest years for fund closes in the last decade. The situation looks much better, however, when considering capital raised; the $73 billion raised in 1H 2013 is already 66% of the total from all of If PE firms continue this pace, 2013 will be the best year for fundraising from a capital perspective in the post-crisis era. With GPs raising fewer small and first-time funds, the average PE fund size has rebounded sharply since hitting a decade low of $402 million in In fact, the average fund size has more than tripled since 2010 to $1.2 billion in the first half of LP commitment sizes have grown in tandem, another indication that capital in the PE space is becoming more concentrated in GPs with long track records of outperformance. Top quartile middle-market funds have clearly become the most favored variety of fund from an LP perspective, says Dennis R. Graham, the firmwide leader of the Private Equity Group Practice at Plante Moran. Specifically, PEGs that were successful with funds in the $500 million to $1 billion range are now able to raise new funds in excess of $1 billion. In addition to fundraising, this report will also examine the capital overhang, which currently sits at $328.4 billion. The amount of dry powder available to firms has steadily been declining from its peak of $473.3 billion in 2008 and is now at its lowest level since With sluggish deal-making in recent quarters and the recent increase in capital raised, it will be interesting to see if this trend continues in coming quarters. We hope the information in this report proves insightful and informs your decision-making process in the coming quarters. If you have any questions, comments or suggestions, please contact us at research@pitchbook.com. is an independent and impartial private equity and venture capital research firm that provides premium data, news and analysis. Through a combination of publicly available sources and rigorous firsthand research with industry professionals, has developed an extensive database with in-depth information and statistics on more than 74,000 companies, 130,000 deals and 30,000 investors. For more on how can enhance your private equity and venture capital intelligence, visit or demo@pitchbook.com. 4

5 Overview $70 Fundraising by Quarter 60 $60 $50 $40 $30 $ $10 $66 $35 $10 $29 $17 $12 $6 $9 $44 $16 $16 $16 $26 $40 $20 $25 $25 $48 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Capital Raised ($B) # of Funds Closed Source: Capital raised hit its highest level in more than 4 years in 2Q The number of funds closed per quarter has varied little over the last two years, with approximately 30 vehicles holding final closes each quarter. Capital raised has been more unpredictable, jumping 88% to $48 billion in 2Q 2013 the highest quarterly total since 1Q Considering these two statistics, it should not be surprising that the average fund size is on the rise and has more than tripled since Two of the biggest factors that have spurred this phenomenon are the lack of new firms and the fact that the smaller, less successful GPs are not raising new vehicles, which has resulted in a dearth of funds of less than $100 million. The number of these funds raised annually declined 70% from 64 in 2007 to 19 in 2012, and just five such vehicles closed in 1H At the other end of the spectrum, it has proven more difficult for even the upper echelon of GPs to close the mega-funds that became common in the pre-crisis era. A handful of firms $300 $250 $200 $150 $100 $ $85 $115 $195 $239 $223 $140 $44 $91 $111 $73 Capital Raised ($B) experienced success raising vehicles with $5 billion or more in 1H 2013, but these were stalwart names like Silver Lake, Warburg Pincus, Riverstone and Encap, all of which nobody expects to have trouble fundraising. Several other high-profile firms, such as Apollo and Carlyle, are enjoying success raising Fundraising by Year # of Funds Closed their next vehicles as well. But many firms that raised more than a billion dollars for their previous fund are recalibrating and setting their sights on the slightly smaller $500 million to $1 billion fund range; investors closed 14 such funds in 1H 2013, setting a pace for the best year since Source: 5

6 Fund Size & LP Commitments Funds with more than $5B made strong comeback in 1H 2013 Due to the long-term nature of PE investing, it often takes several years for strong trends to emerge. The breakdown of fundraising by fund size, however, shifted dramatically in 2010 following the financial crisis and has undergone substantial changes every year since. For example, PE firms closed zero funds with $5 billion or more in capital commitments in 2010 and just three in 2011 and 2012 combined. That changed in 1H 2013, with five funds closing on $5 billion or more. The ability to raise a fund of over $5 billion was for the most part nonexistent between 2009 and 2012, says Dennis Graham of Plante Moran. LPs have a renewed appetite for these mega-funds if they have a strong track record of success. The opposite trend has occurred with smaller funds that have less than $100 million in capital commitments; these vehicles accounted for 33% of the funds raised in 2010 but represented only 8% of the funds closed in 1H Part of the reason for the steep decline in smaller funds is that fewer new PE firms are sprouting up. In 2007, 72 PE firms successfully held a final close for their first fund; two years later, that number was cut by nearly two-thirds to 28. The slowdown has continued, with just two first-time funds raised in 1H Raising a new, first-time or small fund is clearly very difficult in today s environment, Graham says. The role of these smaller funds has been partially replaced in the market by an influx of independent, fundless sponsors. These independent sponsors find target companies and then partner with committed funds to close transactions. Given the number of independent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Fund Count by Fund Size Capital Raised by Fund Size sponsors, zombie funds and the current fundraising environment, this trend is not likely to reverse itself in the near term. $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M Source: $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M Source: Another important development is that many of the firms that raised massive funds early in the 2000s have been forced to reduce their targets in 6

7 $1,800 Average Fund Size ($M) $1,693 $1,600 $1,400 $1,200 $1,000 $800 $600 $677 $665 $979 $896 $1,142 $929 $1,269 $1,047 $1,219 $480 $845 $748 $993 $878 $1,434 $1,232 $400 $200 $586 $537 $402 All PE Funds Buyout Funds Source: more recent fundraising efforts. At the same time, the most successful mid-market firms have gradually been increasing the size of their follow-on funds, as has historically been the case. As such, funds in the $500 million to $1 billion size band have spiked to 24% of all funds closed in 1H 2013 by far the highest proportion in the last decade. Considering the above factors, it is clear that PE fund sizes are trending more and more to the middle. As there continues to be more parity between fund sizes, more competition for deals will be inevitable. We have already seen more deals involving multiple bidders in recent quarters, and valuations have escalated as a result, which has been a contributor to the first half s suppressed deal flow. In response, we have seen PE firms explore new ways to put capital to work, including more minority deals and a higher rate of add-on activity. As we will discuss later in the report, the strong performance from stock markets in recent quarters has led to a reverse denominator effect, providing LPs with the ability to commit more $80 $70 $60 $50 $40 $30 $20 $10 2.0% Average LP Commitment to PE Funds 4.0% 2.9% 3.8% 3.9% $44 $37 $42 $48 $57 $66 $38 $57 $69 capital to alternative assets. This recent empowerment of institutional LPs can be seen in the average commitment size to PE funds, which has climbed sharply from $38 million in 2010 to $69 million in In order to succeed in the competitive fundraising environment, many PE 3.6% 4.0% 3.8% 4.2% Average Commitment ($M) Average Commitment/Fund Size Source: 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% firms have employed placement agents to help attract LP commitments. Between 2008 and 2009, the number of funds utilizing the services of a placement agent rose from 17% to 31%. Placement agents have continued to be popular ever since, with 33% of funds closed in 1H 2013 using them. 7

8 Fund Step-Up $1,400 $1,200 $1,000 $800 $600 $400 Average Step-Up in Fund Size 55% 76% 70% 84% 46% 53% 65% 33% 56% 78% Number of first-time PE funds dwindling Top deal-makers were all too eager to hang their own shingle in the mid-2000s, with about 100 new PE firms sprouting up each year. That has changed in the post-crisis era, as the number of new funds has slowed to a trickle; just three debut funds launched in 1H No. of First-Time Funds by Year $ Average of Previous Fund Size ($M) Average of Fund Size ($M) Source: The average fund step-up compares subsequent funds raised by a GP that fall into the same family (i.e. XYZ Fund III and XYZ Fund IV). As fund performance has rebounded in the last two to three years, it has allowed GPs to pursue larger targets for their fundraises. In 2010, when fundraising and investor confidence were at their lowest, the average fund was 33% larger than its predecessor. But the average step-up in fund size has been steadily increasing and in 1H 2013 hit 78%, which is the second-highest level in the last decade * 2 Source: PE firms have had more success hitting their fund targets Immediately following the financial downturn in 2009 and 2010, barely half of the GPs that closed a fund were able to hit their target. In 2011, 76% of the funds closed reached their goal; that percentage expanded to 83% in 2012 and 1H The flight to quality by LPs can be seen when considering these figures, as presumably top-performing GPs will have an easier time reaching their targets. Another possible explanation is that PE firms have reined in their fundraising targets in light of the current fundraising environment. Percentage of Funds that Reach Target Size by Vintage 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reached Fund Target Missed Fund Target Source: 8

9 Closing Time & Time Between Funds Firms wait longer between funds, spend less time on the road As firms endeavored to raise larger funds in the years leading up to the financial crisis, the average time to close a fund crept up as well. With cash flowing freely in the mid-2000s, the average time to close a fund hit a low of 7.7 months in But from 2005 to 2010, the average time to close a PE fund shot up 134% Years PE fund closing times have dropped by 34% since peaking in to 18.0 months. That trend started to reverse course in 2011, and the closing time dipped 28% to 12.6 months in Closing times were comparable in 1H 2013, and the combination of shorter fund raises and larger average fund sizes appears to have emboldened PE firms. For example, GTCR is hitting the road seeking more than $3 billion for a new fund after closing a similarly sized vehicle just a little more than two years ago Months Average Time Between Funds Buyout Funds As closing times have come down, so has the average time between fundraises. Since peaking at 4.82 years in 2010, the time between funds has contracted to 4.06 years in 1H 2013, which is inline with pre-crisis levels. One of the reasons the time between funds expanded 4.06 Average Time to Close Source: All PE Funds Source: was that there were fewer attractive investment opportunities, and with large reserves of dry powder, PE firms simply did not have a need to raise new capital. But the capital overhang has been declining for several years and deal flow is expected to accelerate in the second half of 2013, which has compelled GPs to refill their coffers. Another major factor that impeded fundraising in the years immediately following the financial crisis was the denominator effect; as the value of equities and securities deteriorated, it resulted in PE becoming a relatively larger proportion of institutional investors portfolios. As such, many LPs had to curtail their commitments to PE and other alternative asset classes as they recalibrated their investment allocations, particularly in Now that stock markets are on a tear, a reverse denominator effect is occurring, and LPs once again have the capacity to apportion capital for PE. 9

10 Dry Powder $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $441.4 $473.7 PE Capital Overhang ($B) $441.4 Cumulative Overhang $404.0 $362.6 $ As of Year Current Overhang by Vintage Note: The LP reporting cycle is two quarters behind the most recent quarter ended. s most recent fund returns data is through 4Q Source: Several years of muted fundraising activity has resulted in a steady decline in the capital overhang, which reached an all-time high of $473.7 billion in PE firms have finally deployed much of the dry powder that accumulated during the mid-2000s, but there still remains more than $50 billion in funds raised between 2007 and These vehicles are now past the typical five-year investment period and risk having to return capital to LPs. More than three-quarters (76%) of the capital remaining in 2007 to 2008 vintage funds is concentrated in vehicles with $1 billion or more in capital commitments. As such, the firms that are managing these funds will likely have to seek out relatively large transactions in order to put their capital to work in a timely fashion. Funds with $1 billion or more in committed capital represent 73% of the current overhang, but with the recent trends in fundraising, that proportion seems primed to grow. For the 2012 vintage, 80% of the current dry powder is held in funds of at least $1 billion. Large funds were popular in 1H 2013 as well, and there are several other $1 billion plus funds preparing to hold a final close in the coming quarters. Current Overhang ($B) by Vintage Year and Fund Size Fund Size $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M $12.23 $9.28 $3.16 $2.88 $ $24.89 $19.12 $7.20 $3.60 $ $7.44 $14.97 $3.01 $3.60 $ $6.73 $5.02 $3.47 $1.78 $1.04 $13.05 $34.03 $10.51 $4.32 $ $46.99 $41.12 $11.48 $7.17 $ Source: 10

11 Large buyout funds hold vast majority of dry powder PE Capital Overhang* ($B) by Fund Size $120 1% 4% $100 $80 $60 $40 $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M 34% 8% 14% $ Under $100M Source: 39% Buyout funds account for roughly three-quarters (76%) of the current capital overhang. The second-largest contributor to the overhang is mezzanine funds with 9%, followed by energy with 6%. There has been an increasing proportion of growth equity deals in recent years, but these funds represent just 4% of the current overhang. With more firms pursuing minority deals, it will be interesting to see if more growth/expansion funds are raised in the coming years, or if these deals will continue to be executed largely from traditional buyout funds. *Capital Overhang Explanation Calculated using the most recently available fund cashflow data, the current capital overhang is updated through December 31, Keep in mind that some funds with a 2013 vintage began investing in 2012 and already have fund returns, which is why a small number of 2013 vintage funds are included in the overhang. In addition to the reported capital overhang, also shows $32.9 billion of capital remaining in 2004 to 2006 vintage funds. As these vehicles are now past their investment window, it is often unclear what will happen to the remaining dry powder. PE Capital Overhang* ($B) by Fund Type $120 $100 $80 $60 Other Diversified Private Equity Mezzanine Energy 6% 2% 4% 9% 1% 2% $40 $20 PE Growth/Expansion Co-Investment Buyout 76% Source: 11

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