To kick off the new year, we’re giving our Spotlight subscribers an exclusive sneak peek at the upcoming 2017 Preqin Global Private Equity & Venture Capital Report, including:

  • A keynote address from KKR’s Joseph Bae
  • 2016 in numbers
  • Fundraising, deals and performance benchmarks
  • First-time fund managers
  • The outlook for 2017

Private Equity: 2016 In Numbers

Private Equity & Venture Capital

Private Equity In 2017

– Christopher Elvin, Preqin

2016 was another stellar year for private equity and the total AUM for the industry now stands at $2.49tn as of June 2016 (the latest data available), an all-time high. The question on many people’s minds is ‘how much longer will it continue?’ While the reality is that only time will tell, private equity is well positioned for another strong year in 2017, despite continuing economic concerns and wider political volatility.

Private Equity Continues To Deliver For Investors

In the three years to June 2016, private equity investors have seen annualized returns of 16.4%, the highest among all private capital strategies. As a result of this strong performance, investors have continued to see distributions signifi cantly surpass capital calls: $257bn was distributed in the fi rst half of 2016 compared with $129bn in capital calls – so a net cash fl ow of $128bn back to LPs. The trend of capital distributions surpassing capital calls is now in its sixth year, and it is the third year in which net cash fl ows to investors have been well in excess of $100bn.

Fifty-seven percent of institutional investors now have an allocation to private equity, and as a result of high distribution levels, investor satisfaction is at an all-time high – 95% of investors recently surveyed (see pages 85-87) stated that private equity had met or exceeded their expectations in the past year; 48% of respondents plan to increase their allocations to private equity over the long term, while a further 46% will maintain their allocations. Similarly, 49% of LPs are looking to invest the same amount of capital and 40% are looking to invest more capital in private equity in the next 12 months than they did during 2016.

A Thriving Fundraising Environment

Driven by LP demand and liquidity, 2016 was the fourth consecutive year in which private equity fundraising surpassed $300bn. However, there is a clear trend towards greater concentration of capital among fewer funds – 12% fewer funds closed in 2016 than in 2015, resulting in the average fund size increasing to $471mn, an all-time high. Private equity accounted for 57% of all private capital raised in 2016, up from 52% the previous year.

Perhaps the greatest indication of the liquidity LPs currently have, as a result of the wave of distributions they have received over the past few years, is the fact that 76% of private equity funds closed in 2016 met or exceeded their target size. This represents the largest proportion of funds meeting or exceeding their target size in any year over the period 2009-2016, with the proportion failing to meet their target decreasing from 63% in 2009 to 25% in 2016.

Still A Seller’s Market

While the volume of private equity backed buyouts in 2016 (3,986) is expected to surpass the record number of transactions seen in 2014 (4,006) as more data becomes available, aggregate deal value ($319bn) was 25% lower than in 2015 and reached the lowest level seen since 2013 ($313bn). Venture capital deal fl ow in 2016 saw the opposite trend: 9,719 deals were recorded during the year, the lowest number since 2013, but the aggregate value of deals reached $134bn, just behind the record amount achieved in 2015 ($140bn).

Fund managers are clearly finding it tough going due to the current high entry prices for assets. They are also clearly seeing more competition for assets: Preqin’s latest survey found that 42% of fund managers feel that there is currently more competition for transactions, and 38% of respondents feel that pricing for portfolio companies is higher than it was 12 months ago.

Despite 2016 being the second consecutive year in which both buyout and venture capital exit activity has fallen (see pages 114 and 130), it is still very much a seller’s market, and exit activity is higher than all years prior to 2013. Thirty percent of fund managers expect exit activity to increase in 2017, and a further 46% expect it to remain at current levels.

Outlook For 2017

The private equity model is working and in a low interest rate environment the asset class will continue to appeal to investors looking for high absolute returns and portfolio diversification.

A record number of private equity funds are currently in market: 1,829 funds are seeking an aggregate $620bn. This will bring challenges, particularly for first-time and emerging markets managers, in competing for investor capital as well as in meeting the demands of an increasingly sophisticated investor community.

However, with the majority of LPs sitting very liquid as a result of continuing distributions and looking to maintain, if not increase, their exposure to the asset class, fundraising has rarely looked so appealing.

A significant proportion of assets invested prior to the Global Financial Crisis (GFC) are yet to be realized, so should market conditions remain favourable it is likely that the fervent exit activity will continue in 2017. While pricing remains a very real concern, fund managers have record levels of capital available to them and our survey results indicate that many are looking to increase the amount of capital they deploy over the next 12 months.

2016 Fundraising Market

An aggregate $347bn was raised by 830 private equity funds closed in 2016, marking the fourth consecutive year in which fundraising has surpassed $300bn (Fig. 4.1). This fi gure is likely to increase as more data becomes available, and the fundraising total for 2016 is expected to exceed the level seen in 2014 ($348bn), therefore representing the largest amount of capital raised since the GFC. Private equity accounted for 57% of all private capital raised in 2016, up from 52% the previous year. The increased demand has been supported by continued high net distributions (see page 26), which have caused LPs to reinvest capital back into private equity in order to maintain their allocations.

Alongside the large sums of capital being invested through traditional fund structures, a substantial amount of capital is being invested via alternative structures such as co-investments and separate account mandates. Among LPs profiled on Preqin’s Private Equity Online, 42% actively make co-investments and a further 12% are considering doing so; 30% make use of separate accounts, with 9% considering this route.

Private Equity & Venture Capital

Quarterly Fundraising

The flow of capital into private equity funds is presented in Fig. 4.2, which shows the capital raised each quarter via interim and final closes, highlighting the strong fundraising in recent quarters. The methodology to calculate this involves analyzing the capital raised for each close that takes place in each quarter; only fresh capital is counted, with capital that has been raised via previous closes held in an earlier quarter excluded. The second quarter of 2016 was a particularly successful period, with $117bn secured, the largest sum of capital raised in a single quarter since Q2 2008, when $137bn was raised.