Institutional investors generally take a varied approach to investing, looking to diversify their portfolio in order to avoid unnecessary risk. However, GPs have increasingly been focusing on sector specific (including real assets) investments rather than diversified funds, as seen in the chart below. According to Preqin’s Funds in Market online service, less than 40% of capital raised in 2015 YTD has been raised by diversified funds, the lowest proportion on record.
The chart demonstrates a general trend away from funds investing in a diverse range of industries and towards more specialized strategies over the last seven years. IT fundraising, for example, rose from just 3.7% of total fundraising in 2008 to 8.5% in 2015. Similarly, investment in energy- and utilities-focused funds rose from 3.3% to 7.8% of aggregate capital raised. The trend marginally reversed in 2013, due to generalist buyout funds raising a large amount of capital that year, as demonstrated by the $18.4bn Apollo Investment Fund VIII and the €10.9bn CVC European Equity Partners VI.
Apollo Global Management and CVC Capital Partners, like most private equity firms using a buyout strategy, invest in a wide range of industries. In fact, from 2008 to 2015, 78.4% of all capital raised was raised by buyout funds with a diversified industry focus. In contrast, just 25.1% of total venture capital raised since 2008 was raised by funds with a diversified approach. The most common industry focus by venture capital funds is IT, which is targeted by 39.6% of venture capital fundraising.
Preqin’s data also reveals how some industries have fallen out of favour with private equity. Most notably, clean technology fundraising, which peaked in 2009 on $8.3bn, has dramatically fallen since then. So far in 2015 just $1.4bn has been raised to invest in clean technology. Equally, when looking at funds currently raising capital, only 6.4% is focused on IT, a drop of two percentage points from funds closed in 2015. Forty-five percent of all capital currently in market has no specific industry focus, a higher proportion than all funds closed so far in 2015. This could be partly due to the largest fund in market, Blackstone Capital Partners VII, which is targeting $17.5bn with a diversified industry focus.