The February edition of Preqin’s monthly newsletter, Private Equity Spotlight, highlights mega buyout funds and key issues private equity investors face in 2014. The newsletter offers “encouraging statistics across private equity fundraising, exits and investor appetite” and a look ahead to developments in the PE markets in 2014.

Private equity buyout funds: top performers

The newsletter points out the excellent returns enjoyed by private equity buyout funds over the last few years. “The horizon IRR for the buyout fund type clearly shows the outstanding performance for the three, five and 10 years to June 2013, with this particular strategy performing even better than the private equity asset class as a whole over these periods, recording an annualized IRR of 25.5% for the 10 years to June 2013.”

The phenomenal returns of PE buyout funds has led to a huge bump in the popularity of the asset class, with recent buyout funds increasing capital targets significantly and still being oversubscribed.

“Buyout has traditionally been the most prominent private equity strategy in recent years, generally securing the most aggregate capital of all fund types and receiving much attention in the press for its successes. In January 2014, the final closing of Apollo Investment Fund VIII on $18.4bn was widely reported, noted for its ranking as the largest private equity fund to close since the onset of the financial crisis in 2008. The mega buyout fund surpassed its original target of $12bn quite significantly, collecting $17.5bn of commitments from third-party investors.”

Regulation and fund extensions are key 2014 issues

The Preqin newsletter suggests that two key issues confronting the PE markets in 2014 are looming national and international regulations and the increasing need for fund extensions.

Private Equity Funds

In Preqin’s December 2013 survey of institutional investors, more than a quarter (26%) of LPs interviewed mentioned regulation as one of the major challenges that the private equity investor community must face in 2014. Specific regulatory concerns include issues surrounding the future implementation of Solvency II and Basel III, and more pressing, the Alternative Investment Fund Managers Directive (AIFMD) that will come into full effect in July 2014.

Private Equity Horizon IRRs

Private equity firms only have a limited window to invest the funds raised. They are only allowed to make new investments during this period of time, typically four to six years from the closing of its first investment. The newsletter also highlights the fact that a growing number of PE firms are having to make fund extensions. “The proportion of LPs that have been approached by their GPs to request a change of terms has risen steadily from 46% in December 2012 to 56% in June 2013 and 67% in December 2013. This gives a strong indication of the challenges that teams face in order to deploy capital in the originally allocated investment period.”