United States: US Managers Dominate Fund Raising Activity

Over the last three decades, the US has been at the vanguard of the Private Equity growth story so it is little surprise that their top managers rule the roost.

The United States dominates the PE marketplace when it comes to AUM (assets under management) size. It's estimated that the top 300 global PE managers manage USD 1.5 trillion in assets, of which US-based managers account for USD 1 trillion; this compares to USD 177 billion among UK-based managers.

Over the last three decades, the US has been at the vanguard of the PE growth story so it is little surprise that their top managers rule the roost.

As Anastasia Williams, Head of Private Equity, Americas at TMF Group remarks: "The big PE fund managers keep getting bigger and I think that is a trend that will continue to play out, certainly among those managers who are US-headquartered.

"If each fund is 20 or 30 per cent bigger than their previous fund, these managers will continue to attract the majority of capital inflows."

The net effect of this is that the gap between the top 300 managers and the rest of the industry will widen. Williams agrees. She points out that the KKRs, Apollos and Blackstones of the world are on a wave of momentum, "doing a lot acquisitions but also engaging in greenfield investment activity, building their own offices etc."

These US-based managers are dominating fund activity across the globe. In Asia Pacific, for example, TPG Capital recently became the fourth US-based firm in the last 10 years to raise more than USD 4 billion for an Asia-focused buyout fund, closing TPG Capital Asia VII with USD 4.6 billion.

These multi-billion fund managers are backing up their fund raising success by producing good returns for their investors. They have the economy of scale and depth of experience that institutional investors appreciate, relative to an emerging manager.

"We see global pension plans relaxing their rules on alternative investments, in terms of what is considered an allowable investment or not, and this is making them more open to PE investments," says Williams. "We have seen this in Brazil, in Chile, and there was an announcement last year from Mexico. Pensions are making huge PE allocations that I don't think an emerging manager can capture."

As PEnews reported, in the past eight months, firms such as KKR, Lexington Partners, BlackRock, General Atlantic, Blackstone Group, Partners Group and Actis, among others, raised more than USD 600 million from Mexican pension funds, according to a report from 414 Capital, a Mexican financial consulting firm.

One of the reasons why LPs gravitate to the biggest US managers is the fact that they have so much money they need to invest. Size matters for these investors. When they are looking to write tickets of USD 300 million or more, they have to go to established names as they cannot take the risk of becoming a dominant investor with a PE manager who might only have USD 1 billion in total AUM.

One of the effects of there being so much dry powder in the market – which is now north of USD 1 trillion – is a trend towards private equity funds engaging in take-private activity.

Williams also notes that some companies are receiving significant capital investments just as they plan to IPO, from PE groups.

According to MergerMarket one in three takeovers of listed companies priced above EUR 200 million involved private equity last year. It is thought that the number of take-private deals could rise further in 2019 as markets begin to show signs of a global slowdown.

Healthcare has proven to be an attractive target for such activity.

As PitchBook reports, three of the four take-private mega-buyouts in the US in 2019, to date, were in the healthcare industry with KKR purchasing Envision Healthcare for USD9.9 billion, including debt, in October 2018.

Williams believes that as PE groups take these companies private, there will be even greater governance oversight from LPs given that de-listing leads to less transparency and less frequent reporting. Since the mid-90s, the US stock market has halved in size. By 2016, there were only 3,627 listed companies, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business.

It is forecast that fundraising in North America could reach USD 401 billion in 2019. This compares to USD 251 billion in 2018 and, revealingly, USD 40 billion in 2017; that's a 10-fold increase in fundraising in just two years, should the forecast figures prove accurate.

That statistic alone underscores just how much acceleration there has been in the North American private equity market in recent times.

By comparison, Europe is forecast to see fund raising levels reach USD 150 billion; up from USD 88 billion last year but only slightly up on USD 123 billion raised in 2017.

"Fund raising activity among US managers is incredible. If one looks at the top fundraising activity right now, Advent International is targeting USD 16 billion for its ninth fund, for example. Warburg Pincus has raised USD 13 billion for its latest fund, and BlackRock has raised USD 10 billion.

"The public markets have rallied for so long, investors are perhaps deciding that there are fewer opportunities to make the desired returns, which these large PE managers are taking advantage of. These are long-term investments, which may protect investors in the event of a near-term market correction, if and when global equity markets fall.

"I think the appeal of private markets is that they offer some protection," outlines Williams.

She believes that one way for emerging managers to succeed in fund raising is to focus on specialty investing. After all, mega-funds need to have a very broad investment strategy to deploy all their committed capital; they can't afford to be limited by a narrow investment universe.

Smaller managers who run a 'pure' strategy that only invests in Asian real estate debt, or LatAm mid-cap companies, or only in industrial or energy assets, have the potential to still attract meaningful assets in this competitive landscape, provided they can articulate their message clearly, and can demonstrate a proven track record.

"I do believe there is still plenty of room for mid-market managers to invest in innovative companies that are too small for the big PE groups to invest in. They need bigger targets if they are looking to put USD 16 billion to work.

"If smaller managers can find a niche to attract some of this institutional capital and present themselves to investors as genuine specialists, this could work to their advantage; and in turn help investors diversify their portfolio within the broader private equity space," concludes Williams.

TMF Group is your go-to partner for administering your Capital Markets transactions and PERE investments. Need more information? Contact us today.

This article was originally published by Private Equity Wire and Property Funds World.

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