Observing the accumulation of assets by the major players in the private capital markets and the growing number of megafunds being raised, many wealth advisors are asking valid questions about what’s driving this expansion and how it will impact the industry. Indeed, the world’s largest private capital fund managers have reached a scale today that would have been hard to imagine a decade ago.
The top 20 managers by size currently control about $1.6 trillion in capital, or almost 30% of total global private fund assets, including dry powder. To put that in perspective, this group represents only a fraction of 1% of the more than 10,000 private fund managers in the world, and their combined assets under management today is 70% greater than the entire industry managed 15 years ago.
The growth of these large firms and the concentration of private capital into their funds has been propelled by a number of factors. One of the main drivers has been their expansion across private asset types, including credit, real estate and infrastructure. For example, according to Preqin data, while the amount of private equity AUM grew almost fivefold from 2004 to 2018, the amount of capital targeting private infrastructure increased 29x, natural resources grew by 14x, private debt by almost 10x, and private real estate by nearly 8x.
The Big Get Bigger
The major firms that had the strategic vision to aggressively diversify were able to take advantage of their existing networks of institutional investors and their brands to attract senior talent and, in many cases, acquire entire teams from competitors to accelerate their entry into new markets. Their strong balance sheets and large back offices also allowed them to quickly ramp up multiple initiatives at once. In other cases, private capital firms that were early leaders in sectors that took off, such as technology and infrastructure, have become exponentially larger just by riding a massive wave.
Many of these firms have also become more professionalized, with improved risk management capabilities and more sophisticated infrastructure. As they’ve become more institutional in nature, they’ve built databases for prospecting, implemented formal processes around deal sourcing and due diligence and, in many cases, prepared succession plans to secure the next generation of leaders. Their investment committees also routinely evaluate aggregate exposure across industries, asset types and geographies and, in many cases, they’ve hired chief economists to help further sharpen their understanding of the potential effects of macro events.
Larger Players, Larger Deals
On the flip side, this expansion is adding to the increase in dry powder and overall capital in the market, particularly as these firms raise ever larger megafunds ($5+ billion in size). In fact, the $5 billion threshold for a megafund seems almost small these days given the number of funds with $10 billion or more being raised each year.
Megafunds represented just over half of the $235 billion raised by buyout funds that held closings in 2018 and their share of the total buyout dry powder rose to 46%, per Preqin data. This trend is driven by numerous factors, including the need by larger institutional investors to deploy capital into funds with scale and the increase in private transaction deal sizes. In 2018, PE firms completed more buyout deals worth at least $1 billion (119) than any year since the financial crisis.