Private equity is an alternative investment asset class, a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. General partners in private equity firms raise capital and manage funds to yield favorable returns for their clients, typically with an investment horizon between four and seven years. Private funds are formed by combining funds from limited partners including institutional investors- high-net-worth individuals, insurance companies, pension funds etc. The fee structure for private equity firms typically consists of a management fee and a performance fee.
Private equity as an alternative asset class showed stellar performance growth for the year 2016. As of June 2016, total assets under management for the industry now stands at $2.49 trillion. Private equity industry continues to deliver strong returns and distributions for investors.
Some of the key Private Equity Industry trends as of 2016 were:
- $2.49tn private equity AUM as of June’16.
- $820bn dry powder held by private equity funds as of Dec’16, up from $755bn as of Dec’15.
- $347bn aggregate capital raised by 830 private equity funds, closed in 2016.
- $471mn average size of private equity funds closed in 2016.
- 26% of aggregate capital raised was secured by the 10 largest funds closed in 2016.
- 95% of investors believe, portfolio performance expectations have been meet or exceeded.
- 70% of investors considers valuations a major issue in private equity industry.
- 38% of fund managers considers valuations to be much higher as compared to 2015.
- $257bn total capital distributed in H1 2016.
- 84% of investors have positive outlook for private equity as an alternative asset class.
- 48% of investors plan to increase their private equity asset class allocation over the long term.
Private Equity fund raising volume increased in 2016, driven by demand and liquidity factors. Some key insights for robust private equity fund raising environment:
Private equity fund raising activities increased in 2016, an aggregate of $347bn was raised by 830 private equity funds. In the three years to June 2016, private equity investors have seen annualized returns of 16.4%, the highest among private capital strategies. As a result of this strong performance, investors have continued to see distributions significantly surpass capital calls: $257bn was distributed in the first half of 2016 compared with $129bn in capital calls – so a net cash flow of $128bn back to LPs.
- Private equity fundraising surpassed $300bn in 2016 which is fourth consecutive year in a row and greater concentration among fewer funds.
- For year 2016, private equity aggregate capital raised was $347bn, surge of 67.63% when compared with year 2000 aggregate capital.
- Fund managers are clearly finding it tough going due to the high entry prices for assets and increasing competition for assets.
Largest Private Equity-Backed Buyout Deals in 2016
10 Largest Private Equity-Backed Buyout Exits in 2016
Private Equity Industry Outlook for 2017
- Private equity asset class model will continue to appeal to investors looking for high absolute returns and portfolio diversification.
- Large number of private equity funds are currently in market – 1,829 funds are seeking an aggregate $620bn. Major challenge will be particularly for first time and emerging markets managers, in competing for investor capital and meeting the demands of an increasingly sophisticated investor community.
- Major proportion of assets invested prior to the Global Financial Crisis (GFC) are yet to be realized, it is likely that the fervent exit activity will continue in 2017 due to favorable market conditions.
- Although private equity pricing remains a major concern, fund managers have positive outlook for private equity asset class return expectations and will continue to deploy funds over the next 12 months.
By – Ankur