Distressed, Buyout to Drive Private Equity Fundraising
By Tom Stabile January 6, 2016 – FundFire
Private equity fundraising slowed its pace in 2015, but some of the pullback may be big institutional investors delaying new commitments until this year – and likely repositioning their capital into areas such as distressed strategies, say industry watchers.
Private equity fund managers should see 2016 continue the overall fundraising trends of recent years, as investors react to broader public market volatility, says David Fann, president and CEO of TorreyCove Capital Partners, an alts consultant.
“Private equity does best when there’s a lot of volatility in the marketplace, when there is uncertainty and mixed perspectives on public markets and when we continue to have anemic fixed income markets,” he says. “We think it will be as good as it was last year.”
Buyout funds will remain popular, joined by vehicles that can take advantage of companies facing difficulties, Fann says.
“Distressed and quality buyout firms are probably the two areas that are going to lead the charge,” he adds.
Fundraising this year may also benefit from some big investors not following through on planned commitments, such as the $48.8 billion Los Angeles County Employees Retirement Association (LACERA), says Peter Martenson, a partner at Eaton Partners, a private equity placement agent firm. LACERA did not commit more than $500 million of $2 billion it had programmed for private equity last year, he says.
“You’re going to see 2016 be as strong as 2015 if not stronger in terms of fundraising, driven less by the raw opportunity set… and more by the continued movement of allocations into alternatives,” he says. “A lot of people need exposure and they’re going to be putting money to this space. More people need to put money to work in 2016.”
The overall North American private equity market had a muted finish to 2015, bringing in $180.5 billion in new capital, compared to $212 billion a year earlier and $233 billion in 2013, but it still does not appear to be in full retreat, says Dan Cook, senior data analyst at PitchBook Data. “It was an unremarkable year,” he says.
The new year may well bring better fundraising performance thanks to uncertainty in the markets and general unease around the Federal Reserve’s plans to resume interest rate hikes, Cook says.
Private equity may also get additional interest from high-net-worth and ultra-high-net-worth investors who have generally been under-allocated to the asset class, says Todd Thomson, chairman of Dynasty Financial Partners, a platform serving independent advisors that have about $22 billion in total assets.
“Now is the time for many of them to go after the asset class,” he says. “Finding return these days is difficult, and private equity is one of the places where you can potentially get it. And more people are willing to make that tradeoff of illiquidity for [returns].”
More of that broader interest in private equity is likely to head toward distressed investing strategies in 2016, Thomson says.
“There’s a lot of blood in the water, especially around the energy sector, and that’s an opportunity for distressed funds to pick up some assets,” he says.
Distressed was mainly viewed as a European play in recent years, but the attention has begun to shift to the U.S., says Michael Moriarty, director of investment platforms for Dynasty. “It became a U.S. story in the second half of the year,” he adds.
Rising interest rates may especially prime distressed investing opportunities as companies with adjustable rate debt face pressure, PitchBook’s Cook says.
“We’ll see that in energy first, where companies are not able to meet their loan covenants,” he says. “I would look for any kind of restructuring or distressed funds to increase activity.”
Energy market troubles will be an investment opportunity for both distressed equity and distressed debt fund managers, Fann says. “When oil and gas prices recover, money will be made,” he says.
Distressed may benefit as well from a sense that the buyout markets are more “fully priced” today than in recent years, Martenson says. That may also benefit “special situations” vehicles that aim to engineer funding for companies with unique capital needs, he says.
Co-investment funds also might be poised to pick up assets as more investors seek exposure to direct deals alongside commingled private equity funds but look to fund managers to run the process for them, Cook says.
And investors are expressing interest in specific venture capital areas such as biopharmaceutical and technology funds, Martenson says. “Investors are saying, ‘If we’re fully priced on the buyout side, maybe we have room for innovation or entrepreneurs,’” he adds.
Real estate may be one area that sees a fundraising pause in 2016, says Thomson.
“Investors are not quite sure what the interest rate moves are going to do to real estate,” he says. “There are real estate funds that will do well, and ones that are more or less [sensitive] to interest rates, but in general we hear investors believe that a lot of the juice for real estate coming out of 2008 has been squeezed. I don’t think we’ll see the same asset flows in 2016 as we saw in 2013 [and] 2014.”
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