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Big Private Equity Funds Gobble Up Most Money

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The private equity sector has recovered this decade, with fundraising especially strong in 2013 when aggregate capital raised peaked at some $505 billion.

But 2013 was a year of stark division between the fundraising efforts of first-time fund managers and their more established counterparts, according to new research by Preqin, an alternative investments data provider.

Preqin’s analysis showed that the top 30 fund managers have raised an aggregate $1.2 trillion in private equity funds in the last 10 years.

So far this year, the large, longer-established private equity fund managers have benefited most from the positive climate. During and following the uncertainty of the global financial crisis, investors preferred to allocate their capital to bigger, more experienced managers.

The top 30 fund managers — classified by the amount of capital raised in the last 10 years excluding separate accounts — have accumulated a significant amount of the capital from institutional investors, while first-timers have continually struggled to attract such investments.

For funds closed in 2013, the disparity was greatest, with $171 billion (34%) represented by the fundraising efforts of the top 30 managers alone, the highest proportion of aggregate capital the group had accounted for in the period from 2008.

Year to date, the struggles of first-time funds in 2013 appear to have lingered. Maiden funds make up only 6% of capital raised by funds that have closed so far this year.

However, for private equity funds currently in market, first-time ones account for a much higher proportion, 21%, of all capital sought.

According to Preqin, this indicates that while debut vehicles generally have more trouble than established ones in securing investor commitments, it has not deterred first-time funds managers from targeting substantial amounts.

The Elite Five

The top five private equity fund managers are long-established brand names, diversified in strategy and in the geographies they target for investment.

Blackstone Group holds the top spot in the Preqin study, with $119.3 billion raised since 2004 (excluding their separate account mandates), followed by Goldman Sachs, which established its buyout and growth-focused private equity arm in 1986, with $110.5 billion.

Carlyle Group, which ranks third with $81.2 billion, has successfully raised dozens of private equity vehicles and is currently on the road with 10 funds targeting $15 billion.

In fourth and fifth place are TPG, with $62.6 billion, and Kohlberg Kravis Roberts, with $60.9 billion. Predecessor vs. Successor Funds

Carlyle’s most recently closed vehicle, Carlyle Partners VI, raised $13 billion in its November close, surpassing its original target of $10 billion.

Though impressive, Carlyle Partners VI fell short in fund size of its predecessor Carlyle Partners V, which launched in February 2007 targeting $15 billion and closed in December 2008 on $13.7 billion.

Preqin said these figures and dates highlighted the effect the surrounding economic market had on general partners’ fundraising efforts.

Following a time of economic turmoil, such as the decline of the financial markets from Q3 2007, Preqin said, fund managers would understandably choose to moderate the target size of their follow-on vehicles.

After Carlyle Partners VI failed to surpass its predecessor, and given remaining uncertainty and volatility in the markets, the firm reduced the target size for the series’ successor fund significantly.

Indeed, 54% of current funds in the market managed by top 30 firms target less than 100% of the final size of the respective predecessor in the series, Preqin found. Twenty-nine percent specifically target more than 126% of the predecessor vehicle.

Buyout Strategy

A breakdown of fund type shows that so far in 2014, buyout strategy vehicles are the most common among the top 30 firms, according to Preqin.

This was the case from 2008 to 2014, except 2011 and 2012, when real estate funds comprised the largest proportion of funds closed by the top 30.

The rise of real estate funds from 2011 is in line with the recovery in the property market in the U.S. as the sector saw renewed capital flows and rising values which enticed private equity players.

There was also a notable increase in distressed private equity funds closed in 2012, rising from seven vehicles managed by the top 30 managers reaching final close in 2011 to 17 in the following year — a 143% surge.

Road Show

With a shorter average number of months spent fundraising in 2008 to 2010, the top 30 private equity fund managers in this period seemed to be more successful in securing enough investor capital and reaching that final close faster than all other general partners.

From 2011 onward, however, the top 30 began to fall behind.

For funds closed so far in 2014, the gap between the average time spent fundraising by the top 30 managers and by all other managers stood at its widest yet: an average of 20 months for the top 30 managers, compared with 16 months for all other private equity GPs.

But on a closer look at the data, Preqin found that two funds in the top 30 managers’ group distorted the mean for 2014, causing the average time on the road for this group to rise from 16.7 months to 20.3 months.

Looking Ahead

Recent activity from the top 30 fund managers’ suggests that the momentum of private equity’s most prominent players is not stopping, with a number of successful fund closes from the elite managers.

Several mega funds are focusing on Asia, looking to capitalize on the consumer affluence and domestic demand in the region — and illustrating the reach and sophistication of these Western-headquartered firms seeking investment opportunities beyond their home geographies.

Preqin said several top 30 firms were reported to be establishing more offices in different locations around the world, indicating the expansion strategies being pursued by these successful private equity houses.

Check out Ritholtz: The Shame of Alternative Investments on ThinkAdvisor.