For investors, a new year often means the clock starts again — on performance and fundraising, as well as the chance to look back, and importantly, ahead. Recently, a number of outlets have done just that for alternative investments.
In private equity, 2019 was another strong fundraising year. Fortune notes that in the U.S., PE fundraising hit a record $301 billion, far outpacing the previous high of $241 billion in 2017. And while global fundraising dropped slightly in 2019 (from $628 billion to to $595 billion, according to the Wall Street Journal), what are expectations for 2020?
To begin, as the WSJ reports, “the $595 billion raised last year is the second-highest annual sum in the industry’s history. In private equity’s last fundraising boom, before the financial crisis hobbled global markets, the highest annual fundraising total came to $411 billion in 2007.” Moreover, “there are few indications that demand for the asset class is slackening. Public pension funds, stung by declining yields on traditionally safe assets, continue to increase their allocations to private equity and other alternative investments.”
Indeed, Fortune adds: “Private markets continue to attract investors looking for the historically higher returns that can be found outside the public markets. The upshot: PE fundraising this year will likely come in fairly steady, near 2019’s record haul.”
The Value of Experience
To offer a broader view, Private Equity Wire offered its Private Equity Global Outlook 2020. The publication reached out across the PE landscape to consider investment and fundraising trends, opportunities, concerns, and more.
Clayton Dubilier & Rice Partner Thomas Franco was asked how he views “the fundraising environment for global private equity in 2020?” Said Franco: “2020 will continue the trend of political and economic volatility that has been the backdrop of the investment landscape in recent years. Private capital is well suited to play a constructive role in this kind of stormy environment.”
“One of the strengths of the asset class is that it tends to thrive in turbulent times when more conventional capital becomes defensive. During the financial crisis and the great recession that followed, more risk averse forms of capital stayed on the sidelines. Private capital frequently filled the void, providing needed solutions to sellers confronting significant pressure. Asset owners clearly recognise that private capital’s flexibility and adaptability can be powerful competitive advantages in periods of uncertainty.”
He continued: “That said, the more challenging the market conditions are, the more investors place a premium on experience, which should benefit firms raising fund three and above versus firms raising fund one or two. Expect this ‘flight to safe hands’ trend to continue this year.”
Janet Brooks, a Partner at Monument Group, highlights how competitive the landscape has become: “LP appetite for private equity remains robust but the fundraising environment is becoming ever more competitive. This year saw record numbers of first-time funds enter the market, while many established GPs returned to the market faster than expected and others launched new strategies or vehicles to capitalise on this appetite. This has created a ‘two lane’ market for fundraising – with managers in the fast lane closing at cap in a matter of weeks while those in the slow lane need to have both tenacity and resilience to arrive at successful outcomes. This is a pattern that looks set to continue into 2020.”
Trends in Tech, Real Estate
One area that is expected to see growth: Tech, as another WSJ report notes that “The amount of money chasing technology buyouts is set to get even bigger.
The post continues: “As the amount of money raised has grown, deals involving tech companies have accounted for an increasing share of private-equity investment capital… Technology companies have proven attractive investment targets as they tend to be faster growing and less tied to the broader economic environment than sectors such as retail.”
In Private Equity Wire, Brooks notes: “In terms of market segments and sectors in vogue, we are seeing a lot of focus on the technology space across all spheres from venture, through to growth and buyouts as investors target fundamentally strong business models and companies that should be well positioned to grow even in an economic slowdown.”
Meanwhile, The Real Deal notes the potential for headwinds for real estate funds: “As high-yielding real estate deals become harder to come by, institutional investors are starting to become more selective — making it harder for private equity real estate funds to raise capital. Real estate funds closed in the fourth quarter of 2019 totaled $18 billion, the Wall Street Journal reported, citing data from Preqin. That’s down from the $47 billion raised in the third quarter and was the slowest quarter since 2013.”
A late-breaking insight into the venture capital world: Axios’ Dan Primack attended the Upfront Summit in LA, meeting with “at least 50 venture capitalists and nearly as many limited partners in venture capital funds, representing varying geographies, experiences, and specialties.” Primack notes that following sector challenges in the second half of 2019 (i.e. WeWork), questions were raised that VC was “waiting to be flattened by a boulder.”
The outcome: “But then it didn’t happen.”
- “Things didn’t really get worse, save for some portfolio company layoffs that were relatively mild in comparison to the buildup.”
- “Things didn’t really get better, outside of increased focus on profitability.”
- “So everyone just kept pushing along, doing deals. Running on limbo’s treadmill.”