Preqin’s Funds in Market online service indicates that over the course of Q3 2014, five buyout funds solely focused on the UK held a final close, raising a cumulative total of €2.5bn in capital. The closing of a fund raised by Inflexion in the final days of the third quarter, Inflexion 2014 Buyout Fund, has resulted in the total capital raised so far in 2014 nearly surpassing the total amount raised in the whole of 2013. With a quarter still to go this year, 2014 could become a record year for UK-focused buyout fundraising.
While fewer funds have held a final close in 2014 – five vehicles so far in comparison to the 10 that held a final close in 2013 – the average size of the vehicle has risen by more than 90%. Indeed, as can be seen from the graph above, the average size of UK-focused buyout funds has reached a decade high, surpassing the previous record of €436mn in 2006. In 2013, the average final size of a buyout fund focused on the UK was €264mn; in 2014 the equivalent figure was €509mn.
A number of factors could explain the increased activity for UK-focused buyout fundraising. The UK economy has demonstrated increasingly strong growth following the recession, and was proclaimed to have surpassed pre-recession levels in late 2013. While this has undoubtedly boosted confidence in the performance of the UK economy, it is worth noting that private equity activity, like other areas of business, occurs in cycles. While 2013 represented a high point for number of funds raised over the last decade, similar peaks have been seen in 2004 (eight funds), as well as 2007 and 2008 (nine funds each year). The lowest point in terms of capital raised for UK-focused buyout funds came, unsurprisingly, in 2009, with €151mn in capital commitments to the fund type.
The impact of new legislation, for example the AIFMD which was transposed into UK law last year, is still to be felt in the market. This, however, could account for the increase in the average size of funds raised in 2014 compared to previous years. If fund managers were to view the EU (and subsequently the UK) as a more complex area in which to raise funds and invest, then it would not be unreasonable to think that the few firms that do look to fundraise will benefit from less competition. This could allow them to increase the size of their funds due to increased demand from LPs resulting from less choice in the market. Whether or not this trend towards fewer and larger funds continues remains to be seen.