Despite soaring valuations and eroding returns, limited partners are sending more money to private asset classes, causing fundraising to skyrocket to new heights.
In the first half of the year, 369 private equity and private debt funds closed on $264.2 billion, according to PEI data, which tallies funds by date closed. This represents the most capital raised in any H1 since PEI began tracking fundraising in 2008.
Private debt funds closed on $61.6 billion in the first half, near 2015's first-half record of $65.9 billion. Meanwhile, with $36.16 billion raised from unlisted infrastructure funds, that sector also posted a record.
There are good reasons LPs are flocking to private asset classes.
For private equity, despite pressure on returns from full valuations and high levels of dry powder, the asset class remains a strong performer relative to public benchmarks.
Indeed, annualised private equity investments outperformed the S&P 500 total returns index over the one-, three-, and 10-year time horizons, as of 31 December, according to a report from the American Investment Council issued at the beginning of July.
“All private investments, including real assets, will continue to be attractive to institutions long term, particularly because there is a lack of confidence that traditional fixed income and liquid equity are going to be able to generate acceptable returns over time,” Joncarlo Mark, founder of Upwelling Capital Group and a former senior portfolio manager at the California Public Employees' Retirement System, tells us.
“The private markets continue to consistently outperform the public benchmarks across various timeframes, and that relative performance is what is driving investor interest,” Brian Gildea, a managing director in the co-investment team at Hamilton Lane, concurs.
To be sure, these figures only tell one side of the story. Not all firms are raising vehicles easily; rather, activity is being driven by several mammoth funds.
In private equity, the top 10 largest funds closed during the period raised more than $99 billion between them, including both the largest-ever European fund and the biggest pan-Asian fund. In infrastructure, Global Infrastructure Partners III closed a $15.8 billion vehicle, also a record.
“The private equity story is less about the asset class, it is a very manager-specific discussion,” says David Fann, president and chief executive officer of TorreyCove Capital Partners. “A handful of managers have driven most of the capital raising statistics. Those with persistent track records through multiple market cycles are able to raise record amounts of capital. I think it's about the large potentially getting larger.”
For CIOs, it certainly means manager selection has become more important than ever.
A significant public markets correction would put the brakes on fundraising across the board, but in the long term, there's no reason to believe growth in private asset classes would change its trajectory.
This is particularly true for infrastructure and private credit, two asset classes that are younger than private equity and therefore have more room for expansion.
“In terms of investor appetite, the biggest potential grower is still infrastructure,” says Kevin Albert, a partner and managing director at Pantheon. “It's because it's the newest and it takes time for investors to adopt it, and they're still in the process of doing that. It's not a mature business at all. The amount of capital that wants to go into infrastructure is extraordinary.”
Whether or not all this capital can be invested as profitably as limited partners hope is another matter altogether.