Has Middle Market Investment Temporarily Peaked? —PE Hub

Of an Estimated $72B Raised by U.S. Buyout Sponsors Through Mid-Year, 43% Has Gone to Mega-Funds 

PE Hub opines that while many LPs claim they favor small- to mid-sized business investments, that this year the numbers are beginning to tell a different story.   There is increased investment in buyout funds doing deals of $1 billion or more in size.   It may be that mega-funds  while less are simply the only place public pensions and other big institutions can deploy the large slugs of the capital needed to keep their GP stables a manageable size:

Last year marked a near-term nadir for mega-funds, after two weak years. U.S. mega-funds took in less than $12 billion, or 13 percent of the total money raised. The collective target of U.S. mega-funds in the market last year, $80 billion, represented 32 percent of the total sought, suggesting that they were losing their fair share of dollars to small and mid-sized funds.

This year, which has seen a parade of mega-firms file back to market, marks a complete turnaround. Of the estimated $72 billion raised by U.S. buyout sponsors through mid-year, 43 percent has gone to mega-funds. That’s actually ahead of the pace you would expect based just on targets. The collective $124 billion sought by mega-funds represents just 39 percent of the total money sought by U.S. buyout sponsors in the market this year.

So what’s happening? Two years ago, the mega-funds just didn’t have legs, said Karen Rode, a partner at Hewitt Ennisknupp who advises institutional investors on their private equity programs, at the Buyouts Chicago conference in June. But the returns on prior funds have been good, if not stellar, she said, and mega-funds are simply the only place public pensions and other big institutions can deploy the large slugs of the capital needed to keep their GP stables a manageable size. She also pointed to the advent of separate account programs pioneered by Texas Teachers’ Retirement System and New Jersey Division of Investment in which general partners are able to lock in $1 billion-plus commitments across several products. “This industry is full of creative people,” Rode said.

It’s also full of limited partners backing ostensibly out-of-favor mega-funds.

 

LPs Who Claim to Favor Small- to Mid-Sized Investments Seem This Year to Be Making Different Choices