Written By: Steven Winter – Corporate Finance
Fundraising on unlisted markets and prices peaked during the summer break. The fever has spread worldwide.
In the United States, the biggest funds are competing for the first ranks.
American Apollo Global Management LLC, the world’s second-largest fund manager, broke the record for the largest fund in the history of private equity in July: it raised the largest ever private equity fund since 2007’s financial crisis, with $24.6 billion. Apollo plans to invest in North America and Western Europe.
Since the financial crisis almost a decade ago, low interest rates and cheap debt have boosted investors into private-equity funds, as they are looking for higher returns.
Leon Black, CEO of Apollo, declared that the search for yield is not the only reason for the success in their fundraising. He is also seeing two other trends:
the consolidation of relationships among the most successful asset managers with broad product sweeps; and
the migration away from traditional active equity and fixed-income strategies to a more Barbell approach oriented towards passive and alternative strategies.
As a result, Apollo has now achieved $184 billion in fundraising over seven months and should surpass its 2007 full-year level at $239 billion. But the US fund is not alone.
The world’s number one company, Blackstone, which set a record since 2007 with a $21.7 billion vehicle, also set another new record this summer: its total assets under management reached $371 billion, the highest since the founding of the American firm.
Fever has also spread over Europe and Asia.
The British HVAC in June raised the seventh-largest fund in the history of private equity, $18 billion.
The arrival of the Asian giants on the unlisted market could also accentuate the trend in the coming months. For a few months now, Asia has made a strong entry into a playground previously trusted by the Americans and the Europeans, with much greater means. Out of the 10 largest funds in the process of lifting, seven are Asian and are seeking a total of nearly $200 billion. On its own, the Japanese SoftBank is about to complete a $100 billion raise in venture capital.
The expansion to China is starting, as China loosens regulation and global fund managers look for opportunities outside of Western markets. This summer, UBS Asset Management received a license for private-fund management in mainland China, and BlackRock said it plans to set up its first private fund in the country.
Global amounts raised are impressive, but usage is not obvious.
Never since the financial crisis has the industry of the unlisted drained so much capital from retirement funds, banks, insurance companies and large private fortunes. With double-digit returns, the sector is fully benefiting from the protracted effect of low rates. The amount of levies was nearly $295 billion recently, according to Preqin. This is more than what was lifted each year between 2000 and 2005 and from 2009 to 2012. At this pace, the peak reached in fiscal 2007 ($423 billion) at the outset of the crisis has a strong chance of being erased.
The consequences of such huge amounts raised are worth mentioning.
Firstly, the amount to be invested could overcome the market capacity of absorption. Indeed, as a consequence of this rush of investors towards unlisted funds, the “dry powder” of private equity firms (meaning the capital they have to invest) is at its highest. It is more than $945 billion that will seek to be invested in companies in the coming months, according to the latest data from Preqin. It could hit $1 trillion by the end of the year in private equity alone.
To anticipate the liquidity needed as soon as the good target is found, the funds are temporarily placing the cash in ETF (exchange-traded fund) indexed funds. According to http://fortune.com, ETFs, which have grown to more than $4 trillion in assets, can give investors instant and diversified exposure to an asset class, while allowing for quick liquidation.
However, investment opportunities may not be sufficient, as many of the acquisitions are financed by debt.
Secondly, high prices are stated for the targeted investments. The competition between funds increases the valuation of the possible targets. This summer, another record fell in the industry for the prices of acquisition. According to Fitch, the funds, on average, now spend 11.6 times the operating profit of the companies they buy back in Europe. Ten years ago, the average price did not exceed 10 times the operating profit.
In the United States, acquisition costs are at their highest historical levels, around 10.5 times operating profits. And some transactions are much more expensive. At the end of June, HgCapital, for example, had to pay $5.3 billion, more than 18 times the operating profit to buy the Visma software company. Very recently, the Cinven and Bain funds had to raise 12 times the operating profit, or €5.4 billion, to get the German pharmaceutical group Stada Arzneimittel.
To conclude, the equity-capital market is far from lacking in investors for future months.