Private Equity
Private equity's mega-funds are making big moves in 2021
July 27, 2021
This year is looking to be a banner one for private equity's mega-funds, with the likes of Hellman & Friedman closing its 10th namesake fund at $24.4 billion and The Carlyle Group reportedly eyeing $27 billion for its next flagship vehicle—in what would be the largest private equity vehicle of all time.
In all, 12 buyout and growth mega-funds—defined as any fund that has raised over $5 billion—have already closed this year. For context, 18 mega-funds were closed in 2019, and 16 in 2020.
According to PitchBook data and Pitchbook's Q2 2021 US PE Breakdown, at least seven of those 12 funds have raised over $10 billion each.
Separately, two funds—spearheaded by KKR and Carlyle—have targeted or raised over $10 billion, but not closed.
The mega-fund trend has been growing for some time now, and for a couple reasons, according to Rebecca Springer, a private equity analyst at PitchBook.
"Strong public market performance drives increased PE commitments due to the 'denominator effect,' since LPs try to maintain alternatives allocations at a set ratio to public equities allocations. LPs often prefer to re-up with managers with whom they already have a relationship, since this requires less due diligence," Springer said.
When it comes to the question of whether mega-funds generate better returns, she said that overall, they have beaten smaller funds in recent years.
"They are less likely to underperform and less likely to overperform relative to smaller funds," she said.
The resonating shockwaves of the pandemic are still being felt throughout private equity. Springer said the surge in mega-funds isn't a COVID-19-specific trend, but that the pandemic probably did give the funds a tailwind.
"Mega-fund IRRs (internal rates of return) bounced back more quickly than smaller fund IRRs after Q2 2020. The larger portfolio assets of mega-funds may have been more resilient to pandemic effects and are more likely to be marked-to-market against public company comps, which meant these funds shared in the stock markets' rapid recovery," she said.
Marking-to-market is an accounting method that values an asset based on comparable assets with known valuations. In the case of mega-funds, firms are using similar public companies to value portfolio companies, according to Springer.
She said that over the last couple of quarters, mega-funds have also benefited from public market strength, in that they are exiting many investments through IPOs, and from stock sales from previous IPOs.
Springer cited Blackstone's second-quarter earnings call as an example. The firm reported that 33% of its corporate PE portfolio is public—that is, 33% of its PE fund net asset value is made up of stock from companies that have already gone public.
The strong performance of mega-funds only accelerates funding, and the prevalence of these goliath-sized pools of money.
"When mega-funds return capital to LPs after exiting a portfolio company, that allows LPs to turn around and commit to the next fund," Springer said. "And, of course, the extremely strong performance figures for the last couple quarters don't hurt, either."
Featured image via KTSDesign/Getty Images
In all, 12 buyout and growth mega-funds—defined as any fund that has raised over $5 billion—have already closed this year. For context, 18 mega-funds were closed in 2019, and 16 in 2020.
According to PitchBook data and Pitchbook's Q2 2021 US PE Breakdown, at least seven of those 12 funds have raised over $10 billion each.
Separately, two funds—spearheaded by KKR and Carlyle—have targeted or raised over $10 billion, but not closed.
The mega-fund trend has been growing for some time now, and for a couple reasons, according to Rebecca Springer, a private equity analyst at PitchBook.
"Strong public market performance drives increased PE commitments due to the 'denominator effect,' since LPs try to maintain alternatives allocations at a set ratio to public equities allocations. LPs often prefer to re-up with managers with whom they already have a relationship, since this requires less due diligence," Springer said.
When it comes to the question of whether mega-funds generate better returns, she said that overall, they have beaten smaller funds in recent years.
"They are less likely to underperform and less likely to overperform relative to smaller funds," she said.
The resonating shockwaves of the pandemic are still being felt throughout private equity. Springer said the surge in mega-funds isn't a COVID-19-specific trend, but that the pandemic probably did give the funds a tailwind.
"Mega-fund IRRs (internal rates of return) bounced back more quickly than smaller fund IRRs after Q2 2020. The larger portfolio assets of mega-funds may have been more resilient to pandemic effects and are more likely to be marked-to-market against public company comps, which meant these funds shared in the stock markets' rapid recovery," she said.
Marking-to-market is an accounting method that values an asset based on comparable assets with known valuations. In the case of mega-funds, firms are using similar public companies to value portfolio companies, according to Springer.
She said that over the last couple of quarters, mega-funds have also benefited from public market strength, in that they are exiting many investments through IPOs, and from stock sales from previous IPOs.
Springer cited Blackstone's second-quarter earnings call as an example. The firm reported that 33% of its corporate PE portfolio is public—that is, 33% of its PE fund net asset value is made up of stock from companies that have already gone public.
The strong performance of mega-funds only accelerates funding, and the prevalence of these goliath-sized pools of money.
"When mega-funds return capital to LPs after exiting a portfolio company, that allows LPs to turn around and commit to the next fund," Springer said. "And, of course, the extremely strong performance figures for the last couple quarters don't hurt, either."
Featured image via KTSDesign/Getty Images
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