It has long been a goal here at PitchBook to produce a report dedicated solely to considering aspects of limited partners’ perspectives, showcasing our extensive datasets of commitments, fund returns and more. Now, for the first time, here’s our report focused on US institutional investors—primarily public pension funds, corporate pension funds and foundations—and their allocations to private equity (PE) and venture capital (VC) fund managers.
A crucial aspect of the private equity and venture capital landscape to consider is the influence of limited partners. Beyond the fundraising process, the selection of general partners ends up influencing much of PE strategies, determined by the evolving structures of limited partner agreements (LPAs). Accordingly, producing a report dedicated to both the datasets generated by LPs’ activity as well as those most relevant to their perspective has long been in the making at PitchBook. Given the nature of private markets in general and the relative opacity around the activity of many LP types, our first report catering to LPs focuses primarily upon institutional investors, spotlighting a select few public pension funds. Clarifying the contextual data is always critical, so this report draws mostly from three select LP types—corporate pensions, foundations and public pensions—and the datasets contained within this report are subject to a typical reporting cycle lag. Consequently, the data below presents a snapshot of the current status of US limited partners as reflected in the PitchBook Platform, providing some context around the role institutional investors play within the broader LP landscape. The median AUM of most LPs is dwarfed by typical financial institutions—there are many public pensions within the US so the median assets under management (AUM) is actually skewed relatively low. The valuable role PE plays for quite a few LP types, however, is clear from looking at current median allocations. Accordingly, we hope that this report serves as a useful primer on current trends in the interplay between institutional investors and PE and venture managers. As always, feel free to reach us at [email protected] with any questions or comments.
PE & VC commitments
Over the last few years, we’ve certainly seen a proliferation of new fund managers coming to market with unique strategies. As LPs have continued to back the private asset class, many GPs have been fairly successful and managers have been able to meet their targets. In fact, in our 3Q 2016 US PE Breakdown we reported that 90% of PE funds were able to close at their stated targets during that period, a higher proportion than any other year we’ve tracked. While fundraises have been successful, time to close for many managers has increased notably, a trend that we think points to LPs becoming more sophisticated with their strategies and related diligence efforts. Further, managers are chasing more capital as well, evident by the median fund size for both PE and VC increasing noticeably as of late.
We also see this reflected in our LP dataset. One of the primary narratives related to LP commitments to private asset classes in general has been cutbacks in the number of fund managers larger LPs are willing to work with. Being able to write a larger check to a more concentrated group of managers helps LPs in fund term negotiations, ultimately enabling them to reduce their fees and find access to better deal flow in cases where they may be looking for co-investment opportunities. Through all the data currently recorded for the first half of 2016, median commitment size came in at the same level as 2015 at a rather massive $50 million. It’s even more pronounced when benchmarked against the consistently declining number of fund commitments being made.
The venture markets have also experienced a similar long-term trend, in which counts have declined yet median commitment sizes have remained fairly robust. Fundraising across venture has also been exceptionally strong this year, on pace to record the highest amount of capital raised we’ve seen over the last decade, so despite the median commitment size thus far in 2016 ($15 million) coming in at half the figure we saw last year, on a historical basis the figure is certainly higher than any other year dating back to 2006, with the exception of 2014 and 2015.
Further, repeat commitment counts are coming in at the lower end of historical tallies, however, we again see the median size of such commitments remaining high, an indication that larger managers able to cater to larger LP preferences have been able to take advantage. Lastly, commitments to first-time funds have dwindled. As this report primarily profiles public and corporate pensions and foundations, we think these LP types have been chief amongst those looking to shrink the number of managers they work with. The proliferation of new managers over the last half-decade or so can’t be ignored, yet we think many other LP types such as PE funds-of-funds or sovereign wealth funds may account for a larger proportion of investors willing to bet on new GPs and strategies.
Contributions & distributions
Given the cyclical nature of the private market asset class, it should come as no surprise that combined PE and VC distributions to US public pensions are outpacing called capital for the fourth straight year. Dating back to 2013, just over $196 billion has been distributed back to US public pensions, while just $155 billion has been called down by GPs.
Conversely, contributions outpaced distributions each year between 2007 and 2013, with nearly $82 billion alone contributed between the years of 2008 and 2009. While much of the capital that was called down during that time period can be attributed to the record-sized funds PE raised just prior to the 2008 financial collapse, the jump in distributions we’ve seen today in many ways points to the successful cultivation of assets through that rough period that has consistently flowed back to LPs over the last four years. Now, committed capital has still grown tremendously over the last halfdecade, seeing an increase of over 53% since 2010, yet again, the private asset class has certainly outperformed most investment classes for public pensions, who have seen distributions grow by 3.3x during the same period. With private market fundraising remaining exceptionally strong even as deal flow declines across both PE and VC today, the extensive amounts of capital that has been returned to pensions as of late has simply been cycled right back to private fund managers.
Much of continued strong fundraising totals across both PE & VC can be explained by the fact the median distribution size is so high.