Pitchbook recently released its fundraising and capital overhang reports for the first half of 2013. The figures, unsurprisingly, show an industry gradually growing through the economy’s “second recovery”, although the report does provide some interesting trends. Among those trends, three stand out: the drop in the number of first-time private equity fund launches, fund mangers are hitting their fund target sizes at an all-time high, and “dry powder” is at its lowest level since 2007.
The first trend is the 94 percent decline in the number of first-time private equity fund launches since 2007 (the 94% is an annualized figure for the 2013 figure). Overall, through the first half of 2013, Pitchbook’s count of the number of first-time funds started amounted to just two. Everyone in the private equity industry is well-acquainted with the business cycle associated with the industry. In general, employment, cash inflow, and cash inflow accelerate and decelerate based upon macroeconomic conditions. What likely surprises most private equity industry observers is how large the drop in new funds started has been.
What causing the decline? Is it better returns from competing financial management sectors? Is it simply the economy? Is it increased regulatory compliance? Well, the economy and increased regulatory compliance certainly contributed; better returns from other competing sectors is up for debate. Interestingly, the same trend of decreased new start-ups is not present in the hedge fund industry even though overall hedge fund industry returns have also been under pressure.
Source: Pitchbook
The second interesting finding is that fund managers have been hitting their target size at an all-time high. Through the first six months of 2013, 83 percent of fund managers reached their target size – the highest on record. The 83% figure also matches what happened in 2012. This is also quite surprising given that the highest it got during the economic boom of 2005 through 2007 was 70 percent.
It’s not entirely clear what is causing the increase. Some have speculated that investors are in a “flight to quality” mindset, and are therefore shifting funds towards already successful funds. This speculation would be consistent with the decline in the number of new funds. Others have mentioned that the reason behind the drop is that private equity managers have lowered their target sizes. And, by lowering their target size, fund mangers have an easier target to meet. Whatever the reason, fund managers are achieving the target fund size by the highest percentage on record.
Source: Pitchbook
The third interesting finding is that the “dry powder” or capital overhang figures are down to their lowest level since 2007. As some background, dry powder refers to raised funds but not yet invested.
As is shown below, the estimated dry powder figure is about $328 billion. Interestingly, about $50 billion is still left over from 2007 and 2008, with only about $127 billion from 2012 and 2013.
The finding is likely unsurprising to private equity insiders, but it does show an industry that is changing.
Source: Pitchbook
Overall, private equity conditions continue to change. Among the recent trends are the marked decline in the number of first time private equity fund launches, the increased ability of fund mangers to meet their target fund size, and the drop in the amount of “dry powder” since 2007.
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