After five years of consistent growth, total fundraising fell slightly in 2008, before falling back to 2005 levels in the first half of 2009. Preqin examined the impact of fund performance on the fundraising market.
The primary cause of the slowdown is the denominator effect. Investors have found that their private equity allocations have increased as a result of other areas of their portfolios reducing in value disproportionately to private equity. Preqin’s horizon IRRs confirm that compared to public indices, private equity is generating better returns.
Another important factor is that investors are not receiving much in the way of distributions from funds in their portfolios. Between 2004 and 2006, the buyout industry was distributing much more capital than it was investing, despite the fact that fundraising and deal activity were both growing rapidly at the time.
The current crisis has seen both distributions and investments slow and in 2008, the buyout industry called up $150 billion and distributed $63 billion back to investors. This meant that LPs were putting 2.35 times more into buyout funds than they were receiving back from them. This imbalance between contributions and distributions left LPs with little or no cash to reinvest back into the asset class.
As a result, the level of capital available to invest in new private equity funds has fallen, and many investors are currently not able to invest at all. Those that are investing will be committing less capital than in previous years in order to meet revised target allocations.
The number of funds on the road has fallen, but not significantly, so competition amongst these funds is more intense than ever before and GPs will need to use the best intelligence available to attract LPs.
For more information on private equity fund performance, please see how our online Performance Analyst product can help you. Alternatively, similar data analysis can be found in the 2009 Preqin Private Equity Performance Monitor.