For the private equity industry, 2009 is looking a lot like 2003. After yet another tough quarter, the amount of new funds raised plummeted, reaching levels not seen in six years, according to documents London-based private equity research firm Preqin has provided to DailyFinance. Fewer funds are closing, and many of those that are closing are doing so short of their initial targets. There are indicators, however, that the situation could turn around by the end of 2009 or early in 2010.
Private equity funds raised only $38 billion in the third quarter of 2009. This is the lowest worldwide total since the fourth quarter of 2003. From the second quarter of 2008's level of $84 billion, this is a decline of 45 percent, and it is a mere 18 percent of the record $208 billion that global private equity funds raised in the second quarter of 2007. "Historical data shows that the summer months of Q3 often represent a relatively slow quarter for fundraising in any given year," says Tim Friedman, Preqin's head of communications. "For the rate of fundraising to drop by nearly 70 percent over the course of a year is a dramatic fall," he continues, "and demonstrates just how challenging it has become to raise new funds in the current climate."
By the end of the third quarter of this year, 1,574 funds were on the road, down 1,622 quarter-over-quarter. In total, they have a fundraising target of $754 billion, down from $807 billion the quarter before. Part of the reason for this development is that there are fewer funds trying to raise capital. There aren't as many funds launching, and more are being abandoned. In fact, 90 funds have given up raising funds this year, a sharp increase from 30 in 2008 and 14 in 2007. Friedman observes, "Many of the funds that are closing are doing so short of target, and we have seen a number of fund managers putting their fundraising efforts on hold until 2010, or abandoning them altogether for the foreseeable future."
Given these tougher market conditions, it is taking private equity funds longer to close than in the past. In 2004, it took an average of 9.5 months for a fund to close, growing to 10.6 months in 2005, 11.1 in 2006 and 12 in 2007. The gradual increase is likely attributable to the increase in funds entering the market and higher fundraising objectives. In 20089 and 2009, the average time needed to achieve a close grew to 15 months and 18.3 months, respectively. The increases this year and last are more likely the result of constrained financial market conditions. Only 41 percent of institutional private equity investors made fresh commitments to private equity funds in the first six months of 2009, and they are generally investing at a much slower rate -- and in fewer funds -- than in the past.
Friedman explains, "Clearly the problem is not on the supply side -- although we have seen the number of offerings on the road drop significantly over the course of 2009, supply is still outstripping demand, with the amount of capital available for new investments significantly down on recent years as institutions remain reluctant to commit to new vehicles."
Rather, the issue is whether the market is in the midst of a shift away from the private equity sector. Though grim for the first three quarters of this year, Friedman does note that there is hope for the last quarter and the beginning of 2010.
A survey by Preqin suggests that investors will be coming back to the private equity asset class soon, with 54 percent planning to make new commitments in the second half of 2009 and another quarter doing so next year. Over the coming three to five years, 30 percent of investors plan to increase their allocations to private equity, with another 63 percent maintaining current levels. Only six percent plan to draw down their exposure.
"A whole swathe of significant private equity LPs are readying themselves to re-enter the market in the final quarter of this year and into 2010," Friedman observes. "Nonetheless, private equity fundraising is set to remain challenging, and we expect firms without a strong track record to continue to struggle in gaining commitments from a more wary investor community."