Private Capital Fundraising Stays Slow In Q2 Mark O’Hare – Chief Executive, Preqin

Private Capital Fundraising Stays Slow in Q2

2016 has thus far proved to be a cautious year for fundraising in the private capital industry. Macro factors in emerging regions and commodities markets continued into the first part of the year, and ongoing political controversy in the US and Europe have seen markets remain volatile.

It is perhaps unsurprising, then, that private capital has seen its lowest level of fundraising in H1 in three years; funds closed so far in 2016 have raised a combined $281bn, down from almost $300bn raised in the first half of last year. Although Preqin expects these numbers to rise by 10-15% as more information becomes available, Q2 2016 fundraising represents a retreat from near-record levels seen in recent quarters.

Despite this, more fund managers have continued to come to market with new vehicles in the first part of the year. The total number of private capital funds on the road now stands at 2,798, which are seeking a combined $938bn. This is an increase in the number of funds in market, but a decrease in the aggregate capital targeted compared to the start of the year. This is the first such reduction since 2014, and is perhaps a sign of smaller funds accounting for a large proportion of new market entrants.

Private Capital Fundraising

North America Drives Private Equity Fundraising in Q2 2016

The private equity fundraising market accelerated in Q2, as 180 funds closed securing a combined $101bn. Given that these numbers are expected to rise 10-15% as more information becomes available, the aggregate capital secured by funds closed in the quarter looks set to approach the record $112bn seen in Q4 2013. However, while the number of funds closed almost matches the 186 funds closed in the previous quarter, it falls some way short of the 261 funds that closed in the same period last year.

North America-focused funds were the key driver of growth in the quarter; 96 funds focused on the region raised $60bn, accounting for 59% of the aggregate capital raised globally. By contrast, Europe saw 44 private equity funds raise just $33bn in Q2, of which the Ardian Secondary Fund VII accounts for $10.8bn. Only 11 buyout funds focused on the region closed, securing an aggregate $13bn. Elsewhere, 33 Asia-focused funds raised $6bn through the quarter, while seven funds focused on Rest of World raised $1.3bn.

  • Fundraising Success: The majority (54%) of private equity funds closed in H1 2016 have closed above their target size, a record high. Just 21% of funds have closed below their target size, down from 28% of funds that did so in 2015.
  • Dry Powder: The level of uncalled capital available to fund managers of core private equity strategies hit new record highs, rising from $745bn at the end of 2015 to $818bn as of the end of June 2016.
  • Funds in Market: As of the start of July, there are 1,720 private equity funds in market worldwide, targeting an aggregate $447bn, compared to 1,630 funds that were seeking $488bn at the start of the year. This is the first reduction in aggregate target capital since the start of 2014.

“The second quarter of the year has seen robust fundraising activity, with over $100bn raised globally, despite the relatively low number of funds closed. This highlights the continuing trend seen of increased amounts of capital being allocated to a smaller number of experienced fund managers.

Global uncertainties surrounding the US presidential election and the British EU referendum have continued to cast a shadow over the industry, and while North America-focused fundraising has been robust, Europe seems to be experiencing a more cautious environment. With volatility persisting in the wake of Britain’s EU referendum result, we can expect further uncertainty to affect the European fundraising market.”

Christopher Elvin, Head of Private Equity Products

Private Capital Fundraising

Private Debt Fundraising Shows Shoots of Recovery in Q2 2016

The second quarter of 2016 saw 28 private debt funds close, raising a combined $16bn. This is more than double the $7.8bn seen in the opening quarter, and an increase from the $12bn raised in Q4 2015. Increased fundraising was driven by three large direct lending funds, all closing on more than $1bn, and accounting for 42% of total private debt capital secured in the quarter. Nonetheless, fundraising remains down on the levels seen in recent years, with the first three quarters of 2015 each seeing in excess of $24bn raised, including an all-time peak of $30bn in Q3.

The competitive fundraising market indicates that private debt managers remain confident of securing investor commitments, with 276 vehicles currently on the road, targeting an aggregate $140bn. There are 114 direct lending funds on the road, the most of any strategy, seeking a combined $45bn in investor commitments, while 69 mezzanine funds are targeting $31bn. Despite there being only 38 distressed debt funds in the market, the strategy is targeting $46bn of investor capital, the highest of any strategy.

  • Fund Types: Direct lending dominated fundraising in Q2 2016, with 11 funds raising $9bn, the highest of any strategy. Mezzanine funds attracted the next highest level of investor capital ($2.5bn), while four private debt funds of funds raised $1.1bn.
  • Fundraising Success: In H1 2016, 67% of funds that reached a final close exceeded their target size, compared to 45% in 2015. However, the time taken to complete the fundraising process has also increased, from 16 months in 2015 to 17 months in H1 2016.
  • Geographic Focus: Europe-focused private debt funds raised $8.5bn of investor capital over the quarter, up on the $7.5bn secured by vehicles focused on North America. Just one Asia-focused fund reached a final close with a size of $90mn.

“Although private debt fundraising is yet to reach the peaks seen since 2013, Q2 reversed two consecutive quarters of decline. Direct lending was again the driving force behind fundraising, as distressed and mezzanine funds continued the lower levels of fundraising seen in recent quarters.

Given the high number of funds in market and the level of capital targeted, there is hope that fundraising will continue to climb in the second half of 2016. It seems unlikely that Asia-focused vehicles can sustain the strong fundraising achieved in 2015, as just one fund focused on the region has reached a final close so far in 2016.”

Ryan Flanders, Head of Private Debt Products

Private Capital Fundraising

Mega-Funds Buoy Private Real Estate Fundraising in Q2

Private real estate fundraising in Q2 was dominated by two opportunistic funds, which accounted for 56% of all capital secured during the quarter. Overall, 32 funds reached a final close securing $27bn in investor capital, up slightly from the $24bn raised in Q1. However, Q2 marks the lowest number of funds closed in a single quarter since Q3 2003. Capital was concentrated among a smaller number of real estate fund managers, with the average fund size more than doubling from $404mn in the opening quarter of 2016 to $919mn in Q2.

As the two flagship funds closed by Lone Star Funds and Brookfield Asset Management were both primarily

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