Investors Want More Private Equity Relationships

Once again, investors are shrugging off concerns about a possible bubble, this time in private equity.

Private equity firms have raised a record amount of cash in the last five years and deals prices are at highs, but 92 percent of investors surveyed by research firm Preqin say they expect to commit as much or more capital to the asset class this year as they did in 2017. Investors’ behavior channels former Citi CEO Chuck Prince’s 2007 quote about the state of leveraged lending: “As long as the music is playing, you’ve got to get up and dance.” 

Investors are dancing. According to Preqin’s first quarter 2018 report on private equity, one-third of investors will work with additional managers and make bigger commitments. Sixty-three percent of investors will make commitments of at least $50 million, up from 51 percent in the first quarter of last year. Investors’ willingness to work with multiple managers is noteworthy. Since the financial crisis, many institutions have looked to shave their number of external relationships, in part to simplify their portfolios and negotiate lower fees.

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According to Preqin, 60 percent of investors are looking for four or more funds in which to invest, up from 57 percent the year before. Seventeen percent aim to invest in 10 or more funds.

Private equity firms are flush with capital. According to Bain & Company, private equity firms gained almost $3.2 trillion in the last five years, with $701 million raised in 2017. In March alone, Clearlake Capital Group, Harbourvest Partners, and Brightstar Capital Partners raised a combined $6 billion. With so much money to be deployed, companies are competing for the same deals and raising their bids — moves that could drag on future returns.

Preqin’s statistics support concerns about deal pricing. According to the firm’s most recent report, dry powder now amounts to $1.09 trillion. The volume of deals backed by private equity firms was down 6 percent in the first quarter, but the value of those deals was 90 percent higher than in the first quarter of 2017.

Fifty-one percent of investors told Preqin that they are targeting Europe; 49 percent are looking to invest in North America; and 48 percent intend to invest in global funds. Institutions also have renewed interest in the Asia-Pacific region. Twenty-eight percent of investors targeted the region in the first quarter, up from 15 percent for the same time period last year. 

Private equity firms are aggressively targeting investors. A record 2,575 funds were seeking $884 billion in capital at the beginning of the quarter. That’s a 35 percent increase in the number of funds and a 33 percent rise in the amount of capital, according to Preqin. 

The leveraged finance market, which underpins private equity dealmaking, also has troubling parallels to 2007, according to S&P Global Ratings.

Cash-rich private equity managers are seeking leveraged loans to fund mergers and acquisitions this year, while lenders are demanding little in terms of protections and restrictions, according to a new report from S&P Global Ratings. The firm warned that asset prices are approaching — and in some cases, exceeding — thresholds hit in 2007.