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Private Equity Capital Raising Hits Summer Swoon – Fundfire article with quotes by Peter Martenson

Private Equity Capital Raising Hits Summer Swoon By Tom Stabile
October 5, 2016

Private equity fund managers hit a skid in the third quarter both in the U.S. and across the globe, according to new data from Preqin, but it’s not clear whether investors may be taking a pause or starting a broader pullback from new commitments.

Thoma Bravo’s twelfth buyout fund was the largest U.S-based fund to close, raising $7.6 billion in the quarter.

U.S.-based private equity fund managers brought in $36 billion across 105 funds that closed last quarter, the lowest total since the first quarter of 2015, and below the pace of third quarter fundraising in the past two years, Preqin’s figures show. The tally was also off the pace for the year, which saw 114 funds close with $56.2 billion in the first quarter and 120 funds close and raise $60.6 billion in the second quarter.

Fundraising numbers were also down globally, with 170 funds that closed in the third quarter raising a total of $62 billion, the lowest tally since the third quarter of 2013. Preqin notes that it has historically adjusted quarterly figures upward by 10% to 15% as final data trickles in for each period.

Capital raising by U.S.-based firms had been strong in the year’s first half, according to a Preqin spokesman, who says that the last three quarters – stretching back to Q4 2015’s $76.5 billion haul – all topped the $50 billion mark. The down note of the third quarter may not be an ominous sign, he says.

“While the quarter has not kept to the highs seen in its immediate predecessors, it cannot be characterized as an underachieving period for private equity managers in the U.S.,” he adds.

But there is also a general sense that limited partners may be taking a pause from committing new capital to private equity in part because of unsettled macroeconomic and geopolitical conditions and in part due to a lack of compelling investment opportunities, says Peter Martenson, partner at Eaton Partners, a placement agent.

“The challenge in today’s environment is that some [fund managers] are having trouble articulating the investment opportunity,” he says. “In middle market buyout, we hear that EBITDA and multiples are at all time highs, that it’s hard to find companies, and so you have to be careful and pick your spots. LPs hear that message, and some say it’s maybe not a great time to invest.”

In addition, the overall private equity market has huge amounts of uninvested capital built up from the fundraising surge of recent years, and that may also be giving investors pause, said Christopher Elvin, head of private equity products at Preqin, in a statement.

“As dry powder in the industry gets ever closer to $1 trillion, we may see fundraising stay lower as investors wait for fund managers to start putting capital to work,” he said.

The third quarter saw few blockbuster funds closing among U.S.-based managers, with the next largest after Thoma Bravo coming from Madison Dearborn Partners, which wrapped up its seventh buyout fund at $4.4 billion, followed by the seventh buyout product from Thomas H. Lee Partners closing at $2.6 billion. The only other U.S.-based manager closing a fund of more than $1 billion was Technology Crossover Ventures, which closed its ninth expansion/late stage fund at $2.5 billion, according to Preqin.

Several big funds from U.S.-based shops remain in the market, including KKR’s twelfth Americas fund, which is raising $10 billion but is likely to come in slightly higher, according to recent comments from firm executives. There are 960 funds in the market heading into the fourth quarter, seeking $234 billion in aggregate, according to Preqin, with other large contenders including Vista Equity Partners, which is seeking $8 billion for its sixth buyout fund; TPG Capital, which has a $6.3 billion co-investment fund in the market; and KKR’s $6 billion third Asian buyout fund.

The capital-raising potential for those funds may depend on whether limited partners break from a “muddling along” mode, Martenson says.

“Many LPs are doing almost the bare minimum they need to [re-invest private equity capital],” he says. “They’re not going to overextend.”

There isn’t a single factor casting a shadow across the market, like the 2008 global financial crisis, but rather a multitude of issues contributing, such as flat stock market performance, the low interest rate regime, unease over the U.S. presidential election, and the general direction of the global economy, Martenson says.

“People are being more contemplative,” he says. “They are taking it slow.”

One area where there appears to be some activity is in sector-based or specialist funds, where managers ply their expertise in healthcare, technology, energy, and private credit, or even smaller niches such as agribusiness or litigation finance, Martenson says. That’s in part because the message from the broader private equity market is that there is not a lot of “low-hanging fruit” left, he says.

“We see LPs looking for a focused niche where you can articulate what these managers do well,” he says. “They seem to be going after these less intermediated areas than what you’ve seen in the past. They’re not looking to generalists as much over the last 18 months.”

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