- Private equity funds raised the lowest amount of capital last quarter since the first quarter of 2018, as the COVID-19 pandemic ate into corporate activity and grounded travel.
- Data firm Preqin says the decline in private equity fundraising is a “wholesale shift down.”
- Fund managers say the amount and the pace of funding have dropped dramatically, with the five largest funds accounting for a third of total capital raised this year.
- However, new investment opportunities are emerging, and experts told Business Insider that fundraising should bounce back soon.
- Visit Business Insider’s homepage for more stories.
Fund managers raised the smallest amount of capital to invest in businesses in over two years in the three months to July, as the coronavirus pandemic forced operations to close and brought global travel to a halt, according to a recent survey.
And it wasn’t just the amount raised that fell. The pace slowed significantly as well.
Worldwide, fund managers raised approximately $116 billion in new private capital between April and July, according to data firm Preqin. This was the lowest amount since the first quarter of 2018.
It represented “a really definite decline,” said William Clarke, a spokesperson for the data company, who added: “It’s a wholesale shift down.”
In Europe, 45 private-equity and venture-capital funds together raised $36.5 billion to invest in European companies in the second quarter, following lockdowns in major cities.
Preqin said in its quarterly update that a majority of firms actively raising capital were ‘venture’ firms, which invest in newer companies.
The rest focused on ‘buyouts,’ which use debt to buy companies and make a profit on sale by boosting performance.
Preqin said 3,754 funds were active in July, but their ambitions were less than at the start of the year, at $884 billion, compared with $926 billion in January.
“Investors are slowing down”
The speed of fundraising has also taken a tumble.
“It’s taking longer,” said Paul Sampson, a partner in Allen & Overy’s funds and asset management group in London.
“Usually you have 12 to 18 months to raise funds, after which you can’t raise capital. That will be extended: Investors are slowing down, due diligence is harder. They can’t go and see assets.”
Last year, more than half of those funds seeking to raise capital did so within that 12-month window. In the first half of this year, only 39% managed this, according to the Preqin data.
More than half of the fund managers surveyed said they delayed fundraising due to coronavirus. Just 1% ceased raising altogether. Preqin’s Clarke said investors in those funds were concerned they wouldn’t have enough liquidity to meet their pledges.
National lockdowns have hampered in-person meetings, making deal-making logistically difficult.
Clarke said that although a vast majority of investors use video calls and remote apps in their dealings with fund managers, they would rather have a face-to-face meeting to cement those commitments.
More than half of those investors polled by Preqin planned to reduce the number of funds in which they invest and a similar proportion plan to cut the amount they invest due to the virus.
Gulf between large and small funds
The gap between the larger and smaller funds has grown this year.
Clarke said that although the largest five funds raised without difficulty this year, others may struggle: “The top five [funds] account[ed] for a third of all the funds raised.”
Less well- established and smaller fund managers are expected to be worst hit by the pandemic.
“[It] will make it much more difficult for emerging funds… there will be a move to safety,” Clarke added.
Paris-based firm Ardian said in a statement in June that it had raised $19 billion for a fund that would buy stakes in other private-equity funds. The firm did not return comment prior to publication.
According to a report in Bloomberg, Europe-based manager CVC raised $24 billion for its eighth buyout fund in July, one of the largest amounts ever raised for a private-equity fund. The firm declined to comment.
“Big private-equity players are presenting [a] take-it or leave-it proposition. Mega buyout funds [are] still very oversubscribed,” said Allen & Overy’s Sampson.
Healthcare and logistics boom
The pandemic has brought with it new investment opportunities. Preqin’s Clarke said remote healthcare apps and other health services remain a growth area for fund managers.
“Healthcare is obviously going to be a big thing. A lot of the funds are changing their strategies to make them relevant in a post Covid world,” added Allen & Overy’s Sampson.
Logistics has been another boom area for investors in the past four months, Clarke said.
Meanwhile, other areas such as retail and real estate suffered, as companies were forced to furlough workers and switch to remote working, which in turn deprived local restaurants and shops of vital income.
With already overflowing coffers (private fund managers have $1.5 trillion of spare cash known as ‘dry powder’), firms are understandably cautious about raising new capital.
A temporary blip
“Portfolio managers will be thinking now about deploying this capital,” Preqin said in its report.
In the public markets, asset manager BMO Asset Management said in a statement that it had suspended its UK Property Fund this March, “reflecting the unprecedented ramifications of the global Covid-19 outbreak.”
“Several funds witnessed redemption pressures post the outbreak of COVID-19 and reel into the pressure to close their operations in the UK,” said Kunal Sawhney, the chief executive of Kalkine, a global equity research firm.
Despite the challenges presented by Covid-19, analysts, including Preqin itself, expect the capital-raising market to recover as the pandemic passes.
“We would definitely think this is a pause, rather than a wholesale change. There’s every chance fundraising will bounce back in the next year,” said Clarke. “There’s still a lot of capital flowing through the industry.”
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