– The Oil Slump Helps PE Fundraising
– Big PE Deals Hit by Regulatory Guidelines on Leverage
– IPO Enthusiasm Returns to Europe
– Two Groups Soak Up 40 Percent of 2014 Secondaries
– More Anecdotal Evidence that LPs are Committing to Fewer GPs
THE OIL SLUMP “HELPS DRIVE PRIVATE EQUITY FUNDRAISING,” observes the Financial Times, citing Palico data showing $61 billion has been raised for all PE fund types so far in 2015, up 73 percent from the same period last year. The data breaks down capital committed by strategy and region. It also shows that 2,209 private equity funds are currently seeking $811 billion, with the U.S. & Canada the most crowded region, accounting for 37.8 percent of funds. Among strategies, venture capital is the most crowded, with 521 vehicles fundraising, 23.6 percent of the total. Real asset PE funds, “those focused on ownership of tangible goods,” are third by number of funds seeking capital – 18.8 percent – and second in terms of commitments year-to-date – 17.2 percent. The high degree of commitments to real assets reflects rising demand for energy-focused funds in the wake of the recent dramatic fall in oil prices. Asia – Pacific is by far the most popular emerging markets region, accounting for 15.8 percent of capital raised, slightly more than all other major emerging market regions combined.
A LACK OF LEVERAGE MEANS SOME BIG PE DEALS “HAVE FALLEN THROUGH or had to be reworked in recent weeks,” writes Reuters. “Banks, under U.S. regulatory pressure to reduce their risk-taking, are no longer willing to provide as much debt as their clients want. This could lead to lower returns for private equity investors because they are being asked to put more of their own money into deals.” Restraining the banks’ lending are guidelines formulated in 2013 by a group of U.S. regulators that suggest six times cash flow is the upper limit for “reasonable” debt leverage on most PE deals. After recently being reprimanded by regulators, banks which for two years paid little heed to the guidance, “are no longer willing to go much above” the limit. The guidance “is weighing the most on deals valued at more than $2 billion” – the Reuters piece cites several examples – “because smaller deals can be funded to a much larger extent from non-banking sources,” including alternatives asset managers, business development companies and non-regulated shadow banks such as Jefferies.” Watch for syndicates of non-banking capital sources to move into the void.
“IPO ENTHUSIASM RETURNS IN EUROPE,” reports The New York Times DealBook, “after having dimmed somewhat in the fourth quarter of last year.” “Last year was one of the strongest for initial public offerings in Europe since the financial crisis,” with 239 deals raising $66.2 billion in gross proceeds. “But enthusiasm for new offerings dipped in the final quarter of the year, as several IPOs fizzled after their debuts, adding to concerns about the pace of Europe’s economic recovery. Since the new year, there have been 16 offerings, which have raised $3.84 billion in gross proceeds, compared with seven offerings, raising $2.5 billion, at this point last year and 15 offerings, raising $1.18 billion, at this point in 2007.” For the strong momentum to continue, Europe’s economies will have to continue to improve, at a time when the outlook is particularly uncertain.
TWO FUND GROUPS SOAKED UP TWO-FIFTHS OF 2014’s SECONDARY DEALS. If you add up the numbers from a recent Dow Jones LBO Wire story on Lexington Partners and those from a peHUB story on Ardian that appeared in January, the two secondary specialists accounted for a stunning 40.7 percent of 2014’s record $42 billion in secondary deal volume. The figures indicate that the biggest funds have a major advantage in terms of sourcing, analysis and firepower when it comes to buying existing private equity fund stakes. LBO Wire notes that a dozen deals in 2014 topped the $1 billion mark, including two that exceeded $2 billion each. It’s a good bet that many of those deals went to Ardian and Lexington.
MORE ANECDOTAL EVIDENCE THAT LPs ARE COMMITTING TO FEWER GPs: The Financial Times reports that David Neal, “the head of one of the world’s largest investors in private equity believes CalPERS, the U.S.’s biggest pension fund, was right to slash the number of PE managers it uses.” CalPERS is “hoping to cut the number of PE managers it uses by more than two-thirds to 120” in order to cut costs and improve returns. Neal, “managing director of the Future Fund, Australia’s A$109 billion sovereign wealth fund,” says “there just are not enough decent private equity managers around to justify the fees. CalPERS was right; the fees are just too high to warrant having 300 firms.” He adds, “we use 25 to 30 PE managers for a reason. The direction CalPERS is moving in is consistent with how we operate: less is more.” Watch for investors to increasingly follow ‘the less is more’ philosophy.