Competition heats up as private equity funds seek new capital

Apr 10 2014, 3:26pm CDT | by

Signs of momentum that began to build in private equity (PE) fund-raising in 2013 look primed to gather force in 2014. Indeed, as we described in Bain & Company’s latest Global Private Equity Report, the dynamics that are coming into focus on the supply-and-demand front suggest that 2014 could be a year of transition, marking the end of one long PE cycle and the start of a new one.

Following successive lean years when payouts from their PE investments trickled in slowly, limited partners (LPs) now find themselves in an unaccustomed new situation. For a third successive year, the cash returned to LPs in 2013 has well exceeded the amount of capital general partners (GPs) called from them to fund new acquisitions. Cash distributions are set up for more of the same in 2014 as GPs continue to aggressively harvest the $2.4 trillion worth of unrealized investments in their portfolios. Barring a big spike in new acquisitions, we expect distributions to continue to outpace capital calls.

More cash flowing in than flowing out will leave an increasing number of LPs short of their target PE allocations. In fact, 39% of LPs surveyed by Preqin, a leading PE industry data source, last December reported that their PE holdings as a percentage of their total assets under management had fallen below target. Another 44% were at target, and based on current trends, more will be likely to slip below.

Many LPs that find themselves short of their target PE allocation will be eager to pick up the pace of new fund commitments to close the gap. PE fund-raising could see a big upswing. The rebound in PE returns that helped reinforce PE’s performance edge will add to yield-hungry LPs’ inclination to increase their PE exposure. Just how much LPs will increase new PE commitments to restore their PE holdings to the balance they aim for, however, will vary widely from investor to investor.

Meanwhile, on the supply side, there were already a large number of GPs on the road as the year began, offering some 2,050 funds and seeking to raise $740 billion. More GPs will be sure to join them throughout the year, looking to tap the currently receptive market.

However strong LP demand proves to be in 2014, it cannot accommodate this abundant level of supply. To grasp the dimensions of the oversupply, Bain compared the ratio of the amount of capital GPs sought to raise with the amount they actually managed to bring in over the years. Since the financial crisis, that ratio has hovered above three to one (see figure). Even with LP interest in committing to new offerings picking up, the ratio of the amount of capital GPs seek to raise to the amount they will actually manage to bring in during 2014 will be unlikely to fall much below the 2.6 to 1 it reached last year.

The crowded and intensely competitive environment will make for tough fund-raising conditions for all but the best GPs. Those that hope to succeed will need to withstand LPs’ more exacting winnowing process. The winners in the fund-raising race will be able to demonstrate a solid track record of success based on their ability to create value in their portfolio holdings. They will be led by a stable management team with a history of success working together and a clear succession plan that anticipates changes. They will be able to spot attractive market opportunities and articulate a compelling investment strategy to capitalize on them. They will nurture differentiated strengths that enable them to generate alpha, and they will hone a repeatable model that enables them to create value post-acquisition and demonstrate an ability to execute growth strategies.

Recognizing that fund-raising is and will remain more demanding and unpredictable, leading GPs are elevating their fund-raising game from a campaign mounted every few years into a set of five integrated core competencies they refine year-round. First, the leaders carefully flesh out their long- and short-term capital needs and map out their fund-raising schedule well in advance. Second, they build an objective fact base of where they stand with LPs, using the insights from this LP due diligence to fine-tune their approach. Third, they prequalify their target LPs, work to understand their needs, objectives and vetting procedures, and choreograph their optimal LP-portfolio mix. Fourth, they sharpen their sales pitch, making their investment angle clearer, more consistent and more compelling by backing it up with demonstrable facts and results. Finally, they strengthen their investor relations capabilities to become more transparent in their communications and better at reporting on the health of their investments. Firms that can bring these competencies to bear will be better positioned than their rivals to capitalize on the recent revival of LPs’ ability to make new fund commitments and to weather the future fund-raising droughts that will inevitably occur.

Read the full report: Global Private Equity Report 2014

Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Lizard tails may help humans get new limbs
New York, Aug 21 (IANS) Lizard tails have fascinated humans from ancient times, falling off and growing back just like new. Now, scientists have solved the mystery of how lizards can regenerate their tails.
 
 
'Suicide tourism' on rise in Switzerland: Study
London, Aug 21 (IANS) People packing their bags to Switzerland not to rest in its serenity but to end their lives through assisted suicide has doubled in four years, reveals a study.
 
 
Pain pills less effective in irritable bowel syndrome
Sydney, Aug 21 (IANS) Australian researchers have discovered that the immune system is defective in people suffering from irritable bowel syndrome and this renders pain treatment ineffective in such people.
 
 
Neanderthals probably had sex with modern humans: Study
London, Aug 21 (IANS) Neanderthals, the closest extinct relatives of modern humans who lived in Europe and Asia, did not disappear because of humans, a promising study reveals.
 
 
 

Latest from the Network

Madonna's pants up for sale
Madonna's used underwear is being auctioned. The biggest collection of memorabilia relating to the 'Material Girl' hitmaker will be sold by Julien's Auctions of Beverly Hills on November 7 and among the lots up for...
Read more on Celebrity Balla
 
Lizard tails may help humans get new limbs
New York, Aug 21 (IANS) Lizard tails have fascinated humans from ancient times, falling off and growing back just like new. Now, scientists have solved the mystery of how lizards can regenerate their tails. They...
Read more on Apple Balla
 
We're bored, say grumpy policemen at Islamabad sit-ins
Islamabad, Aug 21 (IANS) Policemen deployed at the massive sit-ins here are their wits end since "nothing is happening" and the boredom is too much. Islamabad is swarming with police personnel who are deployed at the...
Read more on Politics Balla
 
'Suicide tourism' on rise in Switzerland: Study
London, Aug 21 (IANS) People packing their bags to Switzerland not to rest in its serenity but to end their lives through assisted suicide has doubled in four years, reveals a study. There are six right to die...
Read more on Apple Balla
 
Poynter, Goulding to marry?
London, Aug 21 (IANS) Star couple Dougie Poynter and Ellie Goulding are said to be contemplating taking the next step in their relationship and getting married. The singers are completely smitten with one another and...
Read more on Celebrity Balla
 
US gurdwaras to help project positive Sikh image
Washington, Aug 21 (IANS) Over 100 representatives from gurdwaras across the US have pledged support for National Sikh Campaign's plan to engage top US political operatives and media firms for presenting the community...
Read more on Politics Balla
 
Pain pills less effective in irritable bowel syndrome
Sydney, Aug 21 (IANS) Australian researchers have discovered that the immune system is defective in people suffering from irritable bowel syndrome and this renders pain treatment ineffective in such people. The gut...
Read more on Apple Balla
 
Jennifer Lopez's first book out in November
Los Angeles, Aug 21 (IANS) Singer-actress Jennifer Lopez has announced that her first book "True Love" will launch Nov 4. The 45-year-old took to Twitter to share the news, reports eonline.com. "Hola JLovers, my first...
Read more on Celebrity Balla
 
Pakistan political crisis: Lawyers on a day's strike
Islamabad, Aug 21 (IANS) Two lawyers' organisations observed a country-wide strike Thursday to support democracy and ensure supremacy of the constitution. The move comes amidst a political imbroglio following the...
Read more on Politics Balla
 
Nawaz Sharif meets president
Islamabad, Aug 21 (IANS) Prime Minister Nawaz Sharif Thursday discussed the current political imbroglio with President Mamnoon Hussain, a media report said. Nawaz Sharif called on the president at the Aiwan-i-Sadr in...
Read more on Politics Balla