Fundraising strengthens, distributions rise and new investors latch onto secondaries.
After racking up $122 billion, $127 billion and an estimated $138 billion respectively during the first three quarters, private equity fundraising is set to further accelerate in the final three months of 2019. With a series of mega funds likely to close in Q4, and investors determined to put more money into PE, fundraising should lock in commitments of between $140 billion and $150 billion in 2019’s final three months. Currently running 3.8 percent ahead of last year’s nine-month mark, with an estimated $387 billion in commitments, fundraising could collect $527 billion or more in 2019, besting the $514 billion raised last year.
Indeed, PE is on pace to close the first four-year stretch where annual fundraising has consistently come in above $500 billion. That record volume marks an era of secular growth, driven by the spreading view that PE produces stronger, less volatile returns than public equities. With more large fundraisings lined up in 2020, and amid investor conviction that PE will do better than public equities in a slow-to-negative growth environment, strong fundraising should continue next year, despite recession concerns.
Some $151 billion has been committed through Q3 to shadow capital (PE co-investments, separately managed accounts and direct investment). That puts it on pace for record commitments of $201 billion in 2019, surpassing last year’s $189 billion peak. Shadow capital’s popularity in uncertain economic times isn’t surprising; it offers greater freedom to time investments. Given the rhythm of commitments, 2019 is likely to be the second-best year for capital earmarked for PE, with $728 billion or more raised. Aggregate commitments peaked at $800 billion in 2017, when exceptionally large vehicles helped raise a record $619 billion for classic fund structures. The aggregate for funds and shadow capital last year was $703 billion.
PE fund values have proven more resilient than listed shares over the past year, notching only a 1.7 percent decline in 2018’s Q4, versus double-digit drops for major stock indexes. Following a 9.6 percent annual return in 2018, PE funds posted a 9.7 percent gain in 2019’s first six months.
Fund distributions, generated from portfolio sales and dividends, are on track for their best year since the peak flows of 2014 and 2015 (see page one table). With managers reducing hold periods to take advantage of what remain near-record prices for assets ahead of a possible recession, funds returned $223 billion in first half distributions. Capital calls, used to buy assets, are down slightly from last year, coming in at some $170 billion in the first half, as increasingly picky fund managers spend larger sums on fewer, more recession resistant assets.
According to Triago’s preliminary estimate, secondaries in 2019 posted nine-month volume of $60 billion, $6 billion shy of 2018’s annual record. With the most crowded deal pipeline we’ve ever seen, Triago expects a new high of $90 billion in 2019. Some $134 billion in unspent capital, earmarked for purchases by secondary funds, funds-of-funds and in-house institutional investors, aided by loans, deferred payments and preferred equity (such leverage is running at a record 45 percent of volume this year), should keep prices near historic peaks.
Average secondary market pricing stands at 93 percent of net asset value, slightly down from the 2017 annual high of 96 percent, while large buyout funds are selling at a record 100 percent of NAV. It’s counterintuitive, but buyers are paying premiums for more transparent, easier to value vehicles as recession worries rise. GP-led deals are a record 36 percent of secondary volume year-to-date.
One particularly potent force behind attractive pricing for secondary market sellers this year has been non-traditional buyers (see page one table). Encompassing investors historically focused on primary commitments, ranging from pension funds to family offices, they account for 56 percent of investment entities looking to buy on the secondary market. Non-traditional buyers put a greater accent on potential appreciation of funds and frequently pay higher prices than specialists who focus more on current net asset value, near term liquidity and the ability to buy at discount.
Premiums to listed stocks may be sustainable, altering PE and public markets.
Asset managers shift to PE from stocks, toehold funds will lead to take privates, GP stake funds and skin in the game align interests, recycling moves mainstream in secondaries, Secondaries measured by PE’s $5.8 trillion AUM.