Private Equity & Venture Capital 1H16 Fundraising & Capital Overhang by PitchBook

LPs continue to seek exposure

Introduction

As we progress through our coverage of the private markets, the extensive datasets on both private equity and venture capital fundraising in this report help further flesh out a holistic overview of investor sentiment and forecasts. Both private equity and venture capital investors embarked on a remarkably active first half of 2016, with both fundraising value and volume at elevated levels. Although strategies differ widely for both asset classes, they are encountering related difficulties in sculpting investment mandates given current conditions.

For PE firms nowadays, sourcing worthwhile deals in a stubbornly high-priced environment remains challenging, particularly when attempting to account for a potential economic downturn or, at best, continued anemic growth. Venture fundraisers face the same challenge of dispensing capital shrewdly in the midst of slowly depressing valuations and round sizes in pockets of the market. Accordingly, when it comes to fundraising, larger, more experienced fund managers are still able to collect plenty of commitments, sufficient to record significant step-ups from prior vehicles. Limited partners are entrusting their capital to those with successful track records and the resources to scour comprehensively for investment opportunities even in the event of a market downturn. That isn’t precluding smaller, less experienced managers or even first-timers from fundraising, as LPs also are cognizant of the advantages in backing emerging managers, and given the relative attraction of exposure to private asset classes are at the very least looking to maintain such allocations. But larger fund managers currently enjoy sizable advantages, particularly in terms of either customizing fundraises such as extending the lifecycle of certain vehicles for PE or targeting bridging opportunities between initial financing rounds and significant capital injections for VC.

In short, fundraising processes are simply more complex in the current environment. To fully inform your own views, we’ve expanded the datasets within this report to cover PE and VC funds located in both North America and Europe. We hope the datasets and analysis in this report help inform your decisionmaking in the coming months—feel free to reach out with any questions.

Garrett James Black

Senior Analyst

Remaining Popular – Private Equity fundraising overview

Private Equity & Venture Capital

Emerging out of the asset class’s peak fundraising years, which spanned 2006 to 2008, PE dealmakers faced daunting tasks: managing struggling portfolio companies while finding opportunities to deploy capital. Strategies had to shift, so in the coming years, co-investment vehicles became more prevalent in order to add valuable equity to deals while sidestepping fees for LPs, restructuring and distressed debt fund counts rose, and mezzanine funds also bumped higher as a percentage of total closed funds. GPs were attacking the market from a different angle. Debt availability shrunk, so PE firms stepped in on that front to bail themselves out via increases in direct lending and mezzanine vehicles. Global growth declined, so companies hampered by unserviceable debt piles were in need of restructuring specialists; again, PE stepped in to bail itself out. Since 2010, as deal flow hit record numbers, trillions of dollars in capital flowed from LPs to GPs and into portfolio companies before eventually flowing right back to LPs in the form of distributions. Opportunities aren’t endless, however, and despite PE transactions noticeably declining on a consistent basis and valuations skyrocketing for the fewer, quality businesses coming to market as of late, fundraising campaigns have continued to enjoy success and dry powder remains at a record level.

Private Equity & Venture Capital

Midway through 2016, over $154 billion has been raised across 195 North American and European PE vehicles, on pace to make 2016 the second best fundraising year since 2008. On a quarterly basis, 2Q 2016 saw $87 billion close across 90 funds, a 31% QoQ jump in terms of total capital raised and the highest figure since 2Q 2014.

Private Equity & Venture Capital

Buyout funds made up 77% of total PE contributions during the first half of the year, higher than any other year on record. Energy funds made up just 3.5% of the value of commitments in 1H 2016, down from 14.4% last year. This sharp drop can be attributed to the vast amount of dry powder that energy funds already hold. The sector has been on a fundraising spree for the past two years, but has yet to deploy much of that capital via traditional PE asset build-ups and instead has seen distressed managers step in to pick apart capital structures. Mezzanine fundraising also dried up considerably in the first two quarters, on pace to raise less than $6 billion in commitments for the year, compared to almost $18 billion last year. The gradual shift on a relative basis back towards traditional buyout funds and away from more niche mezzanine and restructuring strategies reflects the health of available portfolio companies when compared to the years just after the financial crisis.

Private Equity & Venture Capital

Many puzzle over the asset class’s ability to continue attracting hefty LP commitments, yet in our opinion the current uncertain dynamic across the global investment landscape positively impacts PE fundraising. On the public side, low-cost alternatives such as ETFs have helped investors sidestep costly hedge funds and other public equity managers in a period where considerable volatility has hurt the performance of active management strategies. Such products allow LPs to locate other avenues to garner public market exposure at low fees, yet there aren’t many other options when it comes to finding lower-cost private market alternatives. Thus, as LPs have looked to work with fewer managers, committing outsized proportions to certain funds has offered them increased negotiating leverage around both fees and the co-investment opportunities they might seek. These items have noticeably underpinned the successful fundraising performance of 2016, despite a future return profile that appears set to come in lower than we’ve recently experienced.

Mega-funds push total raised – PE fundraising by size

Private Equity & Venture Capital

Midway through the year, the $250 million-$500 million bucket made up 20.8% of closed funds, up from 17.3% last year and 15.2% in 2014. There have been 31 funds that have closed between $500 million and $1 billion in 1H 2016, nearly the same number that we saw in that bracket during the entirety of 2015. Interestingly, the $1 billion to $5 billion fund bucket raised just $50 billion in total commitments across seven vehicles, representing 32.4% of the value raised so far in 2016, a sharp decrease from the 45.4% of the value it made up in 2015. This bucket could be the new “barbell” that some have been expecting, with LPs committing to nimbler operating specialists on one side and megafunds with significant economies of scale on the other.

Private Equity & Venture Capital

Coming in at $280.5 million, the median PE fund size in the first half of 2016 increased 36.5% year over year. Funds with under $100 million in commitments made up just one quarter of the

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