Investor Sentiment
Points to Private Equity

Strong performance has resulted in robust fundraising, along with positive investor sentiment and a steady trend of capital flowing to the largest PE managers.

January 24, 2020

Private Equity Trends: 2019 Fundraising & Deals Update

Private equity funds closed in 2019 raised almost $600bn. This is the fourth year in a row to surpass half a trillion dollars, and the $595bn secured is the third-highest total on record, surpassed only by 2017 and 2018. Dealmaking was also strong, despite declining slightly from the previous year. 2019 saw $393bn in buyout deals and $224bn in venture capital deals announced, compared to $493bn and $271bn respectively in 2018. This was boosted in part by sky-high valuations, which saw the average buyout deal size hit a 10-year high of $490mn.

The impact of high valuations on future performance has weighed heavily on fund managers, and many have been slowing the pace of their dealmaking as they make sure not to overpay for acquisitions. As a result, dry powder has continued to climb and hit a new high of $1.43tn as of the end of 2019 - a symptom of how much the industry has expanded in recent years and an indication of the opportunity-set that may await over the course of the next few market cycles. Competition is unlikely to abate in 2020 - at the start of the year, there are over 3,500 funds in the market, collectively seeking $926bn.

The investor outlook for private equity is positive, so capital will continue to flow into these funds in the months ahead.

Alternative Asset Allocation: Quote Left Image

2019 marked another excellent year for the private equity industry - fundraising and dealmaking activity both remained strong, and investor sentiment is positive, with many institutions looking to increase their private capital investments in the face of a potential downturn…Overall, private equity remains sought-after by investors, and we are likely to see capital continue to flow into the asset class in 2020.

- Christopher Elvin, Head of Private Equity at Preqin

Alternative Asset Allocation: Quote Right Image

Source: 2019 Private Equity & Venture Capital Fundraising & Deals Update

Private equity has delivered higher returns for more recent vintages

Private Equity Trends 2 Graph Line

Source: Preqin Nov 2019

Graph Bubble Trends Billion

Source: Preqin Nov 2019

Steady private equity trend of capital flowing to the largest managers

Private Equity Trends Graph Bar

Source: Preqin Nov 2019

“When focusing on the future, where do you look?”

According to a recently released EY 2019 Global Alternative Fund Survey, “When focusing on the future, where do you look?”, Private Equity is the winner, growing to 25 percent of institutional investors’ alternatives allocation in 2019, up from 18 percent last year. Alternatives as a whole made 25 percent of investors’ portfolios, up slightly from 2018.

Private Equity Trends 2 Graph Bar

Approximately 50% of hedge funds and private equity managers identified pension funds as the allocator that has increased their allocations most significantly in the past two years, and a third of managers identify sovereign wealth funds as the next leading contributor of capital. Private equity managers have been the direct beneficiary with the majority of private equity managers reporting larger fundraises and record amounts of dry powder. Whereas minimal volatility, consistently rising equity markets and low interest rates have challenged hedge managers’ returns, these market conditions have served as rocket fuel for private equity portfolios. Investors do not expect this trend to change over the next two to three years, having reported that they anticipate their allocation to private equity and real estate products to continue to grow.

Source: Forbes Dec 2019, EY 2019 Global Alternative Fund Survey

Private Equity Trends and Key Facts for 2019

As seen in Figure 1, in 2019, 1,316 private equity funds closed, securing $595bn. This is slightly down from 2018, when total fundraising reached a record $628bn.

Dry powder reached $1.43tn as of December 2019, another record high. Private equity dry powder has almost doubled since the end of 2015, when it stood at $750bn – a symptom of how much the industry has expanded in recent years and an indication of the opportunity-set that may await over the course of the next few market cycles.

As of January 2020, there are 3,524 funds in market, seeking a total of $926bn, according to Figure 2. This is almost two years’ supply at 2019 fundraising levels, suggesting some funds may struggle to complete their fundraising processes.

In 2019 there were 5,103 private equity-backed buyout deals announced, with an aggregate value of $393bn. This is down from 6,481 deals that were announced in 2018 with a total value of $493bn, as shown in Figure 3.

Figure 4 illustrates that there were 14,599 venture capital deals announced through the year, worth a combined $224bn. This does not match the record year seen in 2018, when 17,431 deals were announced with a value of $271bn.

Source: 2019 Private Equity & Venture Capital Fundraising & Deals Update

Private Equity Trends 1 Graph Line

Source: 2019 Private Equity & Venture Capital Fundraising & Deals Update

Conclusion

Public pension funds, stung by declining yields on traditionally safe assets, continue to increase their allocations to private equity and other alternative investments. And U.S. regulators are considering ways to allow more ordinary investors into private funds, which could create a fundraising windfall for alternative-investment firms.

Source: Wall Street Journal, Jan 2020

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