The aggregate capital raised by buyout fund managers in 2017 reached a 10-year high of $282bn, with over half (54%) of the capital raised by 15 mega funds. Fundraising has been driven by record-high net distributions: since 2011, private equity distributions have outstripped capital calls, giving LPs more liquidity. A key indicator of buyout managers’ success raising capital is the length of time they spent on the road: buyout funds that closed in 2017 took an average of 10.4 months to reach a final close, compared to 13.0 months for those closed in 2016. Furthermore, 63% of buyout funds closed in 2017 exceeded their original target.
Following the fundraising successes in 2017, buyout fund managers have had their most successful start to a year since before the financial crash, raising a total of $54bn in Q1 2018. Four mega funds have closed so far in 2018, with an additional 19 in market targeting an aggregate $139bn – mega funds make up 47% of all buyout funds in market.
There has also been a notable reduction in the time fund managers take to launch a follow-on fund: buyout funds launched in 2013 came to market an average of 49 months after their predecessor closed, while follow-on funds launched in 2017 came to market an average of 39 months after the final close of their predecessor. In addition, funds launched in 2017 are targeting an average of 20% more capital than the final size of their predecessor funds. Many buyout fund managers are taking advantage of increased LP liquidity and the low interest rate environment, and are coming back to market sooner than expected in the hopes of building up a stock pile of cash before a potential downturn.
Europe-based buyout fund managers are leading the way so far in 2018, with EQT and BC Partners both closing mega funds this year: EQT VIII closed on €10.75bn and BC European Cap X on €7bn. So far in 2018, Europe-focused funds account for 62% of all buyout capital raised, while North America-focused funds account for 34%. However, this trend does not look likely to continue: North America- and Asia-focused funds in market are both targeting more capital ($161bn and $74bn respectively) than Europe-focused funds ($53bn).
The average final size of buyout funds has increased from $1.0bn in 2016 to $1.2bn in 2017, an all-time high. Funds continue to exceed their target size, as achieved by 47% of buyout funds closed so far in 2018.
However, some in the industry are concerned about the increasing levels of buyout dry powder: currently standing at a record $631bn, dry powder is driving up asset prices, which is contributing to growing speculation as to whether buyout funds will continue to deliver their historically strong returns. Preqin’s latest investor survey supports this, revealing the top two investor concerns in 2018 as valuations and the exit environment; furthermore, half of LPs surveyed at the end of 2017 believe sourcing attractive investment opportunities is more difficult now than 12 months ago. Despite these concerns, buyout fundraising has been booming in recent years and 2018 is on track to be yet another strong year. There are currently 341 buyout funds in market seeking an aggregate $295bn, with $72bn already raised via interim closes.
*Vintage 2005 - 2017: Small Buyout ≤ $500mn, Mid-Buyout $501mn - $1,500mn, Large Buyout $1,501mn - $4.5bn, Mega Buyout > $4.5bn