Preqin Private Equity & Venture Capital Spotlight January 2017 – 2016. Still A Seller’s Market

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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 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.

Private Equity & Venture Capital

Capital Concentration

The trend towards greater concentration of capital among fewer funds continued in 2016: 12% fewer funds closed than in 2015, resulting in the average fund size increasing to $471mn, an all-time high.
LPs appear to be investing more capital with a smaller number of proven and well-known GPs, with the largest funds accounting for a greater proportion of overall fundraising. The 10 largest private equity funds closed in 2014 accounted for 19% of overall fundraising for that year; in 2016, the figure is 26%. Similarly, the proportion of capital accounted for by private equity assets over 2016 (Fig. 5.4). Furthermore, GPs were asked about the level of competition in distinct parts of the market:

  • Venture Capital: an average of 37% of surveyed GPs saw an increase in competition across all stages of venture capital investment over 2016, although the largest proportions across every stage had seen no change. Larger proportions of GPs are seeing less competition in earlier stages (seed: 25%; early stage: 22%), a reflection of the large pool of start-up companies these fi rms look to target.
  • Growth: more GPs have observed increased competition for growth investments than for venture capital, making growth one of the most competitive markets in private equity; while 45% of respondents saw no change in competition over 2016, 43% witnessed more, behind only mid-market (51%) and large (44%) buyouts.
  • Buyout: as expected, GPs face the most competition for mid-market opportunities, where surveyed investors see the best opportunities at present (see page 87). More than half of respondents active in the area saw an increase in competition for mid-market assets over 2016. Significant levels of capital secured by the largest private equity firms at the higher end of the market mean that competition for large buyout transactions has intensified.

Private Equity & Venture Capital

Private Equity & Venture Capital

First-Time Fund Managers

The private equity industry continues to grow as new entrants emerge and market their funds to investors. Strong investor appetite for the asset class as well as recent high distributions have encouraged LPs to invest large sums of capital back into the industry in order to meet their target allocations. Despite this demand, there are signs that the market is bifurcating, making it more difficult for emerging managers launching their first fund as many investors seek out established managers with a proven track record. Only 195 first-time funds closed in 2016, the lowest number of emerging funds closed since 2010, raising $25bn in aggregate capital (Fig. 5.11).


The recent lower levels of first-time funds reaching a final close reflect a broader trend in which fundraising by emerging managers as a proportion of the total private equity industry has decreased. Where first-time funds made up 27% of funds closed in 2009, they represented 23% in 2016 (Fig. 5.12). Although the proportion of capital raised by emerging managers has varied, it has generally followed the same trend, with the 2016 proportion (7%) lower than that of 2009 (12%) and significantly below the recent peak of 20% in 2011.

Furthermore, there is a widening division between the average size of funds raised by first-time and established fund managers. Although historically experienced fund managers have on average been able to raise greater sums of capital than first-time managers, the difference has increased in recent years. The average size of a first-time fund closed in 2010 was $114mn, compared with $313mn for non-first-time funds; for funds closed in 2016 the first-time average has increased to $149mn, whereas the average size for established managers has jumped to $564mn.

There are other advantages to coming to market from an experienced position, as can be seen in the proportion of funds exceeding their target size. In 2016, 54% of closed non-first-time funds exceeded their target size, with 23% coming in under target; by comparison, only 35% of first-time funds exceeded their target size and 30% fell short. Additionally, the need to persuade investors of the benefits of a first-time fund and conduct the necessary due diligence means that first-time funds typically spend longer in market before reaching a final close: first-time funds closed in 2016 had spent an average of 15 months raising capital, compared to 14 months for their established peers.

Private Equity & Venture Capital


Although emerging manager funds have generally found it more difficult to attract investor capital, they have tended to deliver better returns to investors. Fig. 5.13 shows that first-time funds have higher median net IRRs across most vintages since 2000, with a significant difference (of at least three percentage points) for 2000-2003 vintage and 2010-2012 vintage funds. The outperformance can be seen particularly in terms of quartile rankings: when compared to similar funds, 31% of first-time funds fall in the top quartile, with a further 23% in the second.

Private Equity & Venture Capital

Private Equity Performance Benchmarks

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Private Equity & Venture Capital

Fund selection remains important, however, as there are considerable fallen short of expectations over the past year, while only 16% feel that they have exceeded expectations.

There are signs that the continued strong performance of private equity funds may be making investors more ambitious in their return targets: the proportion of investors targeting returns of 4.1% or more above public markets has increased to 49%, up from 37% two years ago (Fig. 8.12). However, the fi gure remains down from the 63% of investors that targeted returns of this level in December 2011.

Key Issues Facing Investors

Going into 2017, valuations remain the greatest concern among institutional investors, cited by 70% of respondents (Fig. 8.13). With high company valuations, record levels of dry powder and stiff competition for assets, investors are increasingly concerned about the impact high pricing will have on returns in the future. The proportion of investors concerned about the exit environment is also signifi cant and has jumped from 24% of investors at the end of 2015 to 51% in 2016.

Investors are also concerned about the pipeline of available portfolio companies: 41% see deal fl ow as a concern, up from 34% at the end of 2015. This may be related to investors’ concerns about valuations, as it is becoming harder for GPs to fi nd assets at attractive prices. Nevertheless, the degree to which investors are concerned about performance has lessened slightly compared to the end of 2015, from 40% to 33% in 2016, possibly due to strong returns over the past year.

Although there has been a long-running debate between investors and fund managers over the appropriate level and way to charge fund fees, these issues have attracted particular attention recently, with the SEC launching high-profile investigations of GPs that are believed to have given insufficient disclosure to investors about the fees they charge. This has resulted in many LPs now paying closer attention to their fee arrangements: the proportion of investors citing fees as one of the major issues facing the private equity industry has more than doubled from 19% in 2015 to 39%.

Investors’ Intentions For Their Private Equity Allocations

Despite these concerns, investors remain attracted to private equity and continue to plan further investment. Forty percent of investors surveyed by Preqin intend to invest more capital in private equity over the next 12 months than in the past 12 months, compared with only 11% that plan to invest less. When asked about their next commitment to the asset class, 76% stated that they plan to make their next commitment in Q1 2017, while a further 18% will do so later in the year; only 6% plan to wait until 2018 or later for their next commitment (Fig. 8.14).

Almost half (48%) of respondents plan to increase their allocations to private equity over the longer term, while a further 46% will maintain their allocations – these are some of the highest levels seen over the past six years (Fig. 8.15). With net distributions of capital from GPs to LPs over the past year, investors will need to reinvest considerable sums of capital back into the asset class in order to meet these targets. Finding a home for this capital may prove to be a challenge, as the most in-demand managers often fi nd their funds oversubscribed: 45% of investors reported that it is harder to identify attractive investment opportunities in private equity compared to a year ago, while only 5% believe it is easier.

Re-ups And New Relationships

Although there has been some discussion of larger investors looking to reduce the number of managers in their portfolios in recent years, the signifi cant sums of capital being allocated to private equity mean that a much larger proportion of investors are looking to increase the number of fund managers they work with. Forty-one percent of investors expect the number of fund managers in their portfolios to increase over the next two years.

Private Equity & Venture Capital

Article by Preqin

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