The Triago Quarterly Letter
Favored by record distributions, the greatest challenge for many investors today is how to invest more in private equity without lowering the bar on returns. Less traditional co-investments, secondaries and direct investing offer attractive ways to put relatively large sums to work, but they go beyond the “traditional comfort zone” of many investors, as Klaus Rühne, a partner at ATP PEP astutely observes in our roundtable on private equity’s embarrassment of riches.
The challenge of investing exceptional capital is fostering new forms of co-operation between limited partners and general partners and even creative efforts to pool resources among LPs. The complexity of reinvesting is a theme that runs throughout this issue and it’s one of the greatest catalysts of change that we can identify in private equity.
As always, we hope the information found here will help you make informed decisions.
Antoine Drean • Triago Founder and Chairman
Triago: Seeking Haven in Private Equity
Amid worries about global growth and the end of QE3, PE’s performance reassures investors.
There’s no real consensus yet regarding the economic pros and cons of the U.S. Federal Reserve’s decision to end its third quantitative easing program in October, which pumped some $1.6 trillion into global markets in two short years. But QE3’s conclusion is already compounding worries that the volatility of stocks and bonds will increase in the medium to long-term, as concern persists about slow global growth. All of this is stoking enthusiasm for private equity during a period when its strong relative performance and its
record distributions are encouraging many investors to commit large amounts to the asset class.
The average private equity fund appreciated 7.2 percent in the first half of 2014, topping the S&P 500’s return and handily beating other major U.S., European and emerging market indexes. Based on a slightly more limited sampling in the third quarter, private equity funds registered a 2 percent increase from July to September, gaining 9.4 percent in the first 9 months of 2014, again besting virtually all major indexes over the same periods. When global stock market performance is negative, or particularly uneven – the latter is the case in 2014 – private equity tends to outperform listed equity.
In the nine months through September, private equity funds distributed an unprecedented $359 billion from realized investments, surpassing the annual record of $344 billion in full-year 2013. Distributions are being driven by 2014’s exceptional volume of private equity-backed initial public offerings and the strongest corporate mergers and acquisitions market in years. Given the relatively sluggish rhythm of private equity acquisitions, distributions have already generated $119 billion in net cash for investors, just $1 billion short of last year’s high and on pace for an all-time peak of $159 billion in 2014.
Private equity fundraising is up with a vengeance in the final three months of 2014, with investors committing over $48 billion in October alone. That’s equal to some 14 percent of the $353 billion raised in the first ten months of 2014 and follows a third quarter, summer-induced slowdown when commitments dropped 34 percent to $82 billion. If fundraising continues at October’s clip, it will hit $450 billion in 2014, topping last year’s post-crisis high by 7 percent and beating the trailing five-year annual average of $270 billion by 67 percent.
Indicating fundraising is getting considerably easier, the time that funds spend on the road before final close has dropped to an average of 16.4 months in 2014, the lowest level since 2011. Pitchbook notes that a record 88 percent of U.S.-focused funds holding final closes in 2014 are meeting their final fundraising target, up from an average of only 55 percent between 2009 and 2011. Investors are also increasingly looking beyond established groups, with first-time managers closing on 11 percent of capital raised in the third quarter, up from just 6 percent in 2013’s last quarter.
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