Over the past year, institutional investors have become increasingly attracted to investment opportunities in buyout funds. Preqin’s Private Equity Online shows that aggregate capital raised by buyout vehicles in 2016 amounted to $213bn, compared with $161bn in 2015. Investors consistently view buyout funds as presenting the best opportunities in the market, particularly small- to mid-market buyout funds, which 58% of investors interviewed in December 2016 felt were the most attractive private equity opportunity at the time.
Although buyout funds are successfully raising substantial amounts of capital, investors must examine the state of the market if they seek to generate similar returns to recent years. One factor to consider is the increase in capital available to buyout GPs in the market; in December 2016 there was a record $534bn in buyout dry powder. High levels of dry powder and significant numbers of managers competing for assets has led to high entry prices for portfolio companies, with 38% of GPs articulating concerns about rising prices over the past 12 months when interviewed in December 2016. This has had an effect on institutional investors, which now see pricing as a key challenge for the private equity market, as it could ultimately affect the returns they receive from their fund investments further down the line.
However, investors have not shied away from buyout funds despite these concerns. Of the private equity investors that plan to be active in the next 12 months, over half (54%) are seeking buyout fund investments. Of these investors, family offices constitute the largest proportion at 16%, followed by public pension funds at 14% and insurance companies at 12%. Although no single type of institution dominates the make-up of investors searching for buyout funds, this is not the case geographically: of the 54% seeking buyout funds in the next 12 months, over 60% are located in West Europe (36%) and North America (28%).