In the first three months of this year 219 funds raised a total of $100 billion, over the $95 billion secured in the same quarter a year ago, , the research firm tracking the alternative investment space, said. 

Against a background of low global interest rates, slim yields from conventional listed equities and investment-grade bond markets, wealth management clients have turned to private equity. The asset class is illiquid, typically requiring minimum holding periods of five years or more. Such has been the appeal of the asset class that there is $1.26 trillion of unspent capital in private equity, aka “dry powder”. Debate continues on how easily this can be absorbed with further inflows without diluting returns and encouraging unwise risk.

The biggest private equity fund in the market worldwide is the Softbank Vision Fund, run by SB Investment Advisers, targeting $1.0 billion and at its second close stage; this is followed by the China Structural Reform Fund, managed by CCT Fund Management, targeting $350 million and in its first close phase.

Regionally, Preqin noted that fund-raising activity has switched back to North America, changing from a recent story where Asia was gaining attention. Vehicles targeting North America marked their second highest Q1 fundraising total (133 funds secured $63 billion). Conversely, Europe-focused activity struggled to rebound from its fundraising lull, with Q1 2019 recording the lowest level of activity in an opening quarter since 2015.

There has been a marked downtrend in Asia-focused fund-raising. Some 28 funds secured $14 billion in Q1 2019, which represents the fifth consecutive quarterly decline in the number of funds closed, as well as the second-lowest quarterly capital total in the past five years. 

“This is not necessarily indicative of a slowing market overall - there are a large number of Asia-focused funds currently in market, many of which have already secured significant capital through interim closes. It may suggest that, in a crowded marketplace, fund managers are finding it more difficult to attract sufficient capital to complete their fundraising process,” Christopher Elvin, partner at Preqin, said.

“While the number of funds closed globally was low, those funds able to close in Q1 2019 generally did so quickly and successfully. The proportion of funds failing to reach their targets has fallen year-on-year to reach a new low of just 16 per cent in Q1. At the same time, six out of 10 funds closed had been in market for 12 months or less, a significant jump from previous years,” he continued. 

“This further points to the emergence of a two-tiered fundraising market, wherein experienced fund managers are routinely oversubscribed and so can raise large sums of capital in a quick fundraising process,” he said. 

Double-digits
Performance-wise, Preqin said funds have delivered double-digit returns over the one-, five- and 10-year periods to June 2018. Buyout funds have displayed the highest annualized internal rates of return over three (+14.6 per cent), five (+16.3 per cent) and 10 (+11.5 per cent) years, while venture capital funds have delivered the highest return over one year (+18.9 per cent)

As reported yesterday, momentum in the related venture capital sector has decelerated recently, even though fund-raising remains relatively robust. Venture capital funds raised $9.6 billion across 37 vehicles in the first three months of this year, as the record-breaking activity from 2018 cooled early in the year, according to the PitchBook-NVCA Venture Monitor report. (NVCA is the National Venture Capital Associate.)

That report said that the data might suggest that the number of US funds raised may shrink in 2019 even if capital raised increases. By quarter's end, investors deployed $32.6 billion in VC funding across 1,853 deals, a 10.5 per cent increase in volume and a 22.5 per cent decrease in count compared with the same quarter a year earlier.

Darkening clouds?

As political uncertainty continues, fears that fundraising opportunities will worsen in the private equity industry have increased, according to the latest annual industry report from IQ-EQ, a global investor services provider. The research, based on a survey of more than 120 fund professionals globally, shows that despite the industry remaining resilient overall, fund managers will need to prepare for an increasingly competitive environment.

Last year half of all money raised was directed to the 50 largest funds in the industry, suggesting that competition to attract capital will be fierce, particularly for the smaller players. This is reflected in concerns from fund managers around fundraising as 30 per cent of respondents reported that they felt fundraising would becoming more challenging in 2019 compared with 19 per cent the year before. Similar sentiment is also seen in managers’ views on what they predict to be the most challenging issues facing the industry in 2019. Both fundraising and investment opportunities held the top spot, suggesting that stiff competition in the UK private equity market will continue.