By Benjamin Horney
October 10, 2017
Total private equity fundraising was down during the third quarter despite the closing of the industry’s largest-ever investment vehicle, but PE fund attorneys stand to face an imminent influx of business in the fourth quarter as investors look to the next fiscal year, experts say.
Compared with the previous quarter, the third quarter saw 75 fewer fund closings that were worth roughly $42.5 billion less combined, according to data from research firm Preqin. The third-quarter dip is notable, seeing as in July, Apollo Global Management LLC clinched Apollo Investment Fund IX, a historic, $24.7 billion fund that eclipsed previous record holder Blackstone Capital Partners V, which raised just over $20 billion in 2006.
The slide is not expected to continue, however. Thus far, the private equity industry has raised roughly $52 million more overall than it had at this time last year, with limited partners having pledged a total of $338 billion. Preqin forecasts that by the time 2017 is all said and done, the year’s fundraising could come close to, or even surpass, the all-time total of $415 billion set in 2007.
“Although private equity has seen a dip in fundraising levels this quarter, overall the asset class is still seeing strong levels of investor commitment,” said Christopher Elvin, head of private equity products at Preqin.
The third-quarter fundraising interruption is due to a litany of factors, including that the third quarter is historically not as strong as the rest of the year since investors often make a significant proportion of their fund contributions during the first half, according to Peter Martenson, a partner at placement agent Eaton Partners.
“With limited partners typically making the majority of their commitments in the first half of every calendar year, there is normally a lull in the third quarter given the summer doldrums of holidays and limited partners regrouping for year-end,” Martenson told Law360.
The third-quarter pause can provide institutional investors a number of opportunities as, Martenson noted, investors often take the time to reassess their capital allocations for the upcoming year, determine the target funds coming to market that they would like to invest with, and begin readying for business to pick up in the fourth quarter and beyond.
“And in many cases, you see a resurgence of commitments as limited partners draw upon their next fiscal year allocation in the prior fourth quarter,” he said. “Given the measured pace of commitments thus far in 2017, we expect to have similar fundraising relative to last year.”
While industry insiders say an annual third-quarter dip is to be expected, it’s important for attorneys to have a complete view of why a given year’s slump is nastier or less burdensome than expected.
A year ago at this time, when the third quarter had seen 69 fewer PE fund closings worth a total of $51 billion less than in the previous quarter, experts pointed to factors including increased competition for investor dollars and uncertainty related to the global economy, the U.S. presidential election and the U.K.’s decision to withdraw from the European Union.
Competition is still on the rise, Donald Trump is now president, and it is still largely unknown what the effects of Brexit will ultimately be. Still, the issues that kept PE professionals up at night a year ago are not necessarily the same as those that did so in 2016.
“The North Korea situation and the political environment still raise concerns; however, investors and [general partners] do not seem to be delaying activities like they did last year,” said Sarah Kirson, a senior partner in the investment funds group at Kirkland & Ellis LLP.
She noted that many limited partners are moving toward a reduction in the number of GP relationships they have, while others are increasing allocations to asset classes they may previously not have, such as credit.
“However, these are portfolio construction issues,” Kirson said. “If anything, as fund sizes are increasing, LPs are increasingly challenged to deploy capital. I would also guess that the entire industry is also cautious regarding a general correction. I don’t know if this impacts behaviors, but I would guess it does factor into some GP and LP decision making.”
Today’s investors are intent on finding funds that have a very specific focus and are in an area that isn’t already totally congested, something attorneys should ensure their PE clients are aware of. There is serious potential in the realms of credit, special situations and natural resources, for instance, all of which are specialized areas that could have the potential for greater returns and less competition for investor dollars.
Jeffrey A. Legault, a partner at DLA Piper, specifically pinpointed infrastructure as an asset class that is on the rise.
“Infrastructure remains a hot area for fundraising right now, even though the initial optimism following Trump’s election that there would be an outpouring of public infrastructure projects has faded,” Legault said. “I attribute this partly to the fact that the relatively shoddy shape of public infrastructure in the U.S. means that a big bump in spending on infrastructure projects is inevitable, sooner or later.”
There are always excuses that can be made for why work is slow in a given quarter, and those in the know say that a third-quarter fundraising slump is par for the course, but the best attorneys don’t lean on such problems. There is plenty of work to go around for attorneys focused on private equity, and even a down quarter presents opportunity.
“I don’t know that there is a time where we are not busy, given both the number of private fund clients we have and our close relationships with these clients,” Kirson said. “When clients are fundraising, we have time-critical tactical requirements that need our attention, especially as closing deadlines approach. When fundraisings are fewer, we focus on developing new relationships and on other aspects of existing client relationships.”
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