A survey of private equity fund managers by professional services firm Grant Thornton reveal that private equity fund managers are now being forced to offer deal by deal structure to investors to raise investment capital. In the traditional model, private equities raised a blind pool fund that was deployed to buy businesses and later on sell them typically within a 10 year timeline. But with private equities struggling in recent years to generate the outsized returns that they once did, investors are aggressively pushing for options beyond the traditional multi-year blind pool fund structure.
Alternative Fund Structures Set To Dominate
Image: Private equity groups blog
The survey by Grant Thornton interviewed 156 fund managers including half from North America and Europe. In the new structure, private equity investors are presented investment opportunities on a case by case basis which in turn allows the fund to tailor programs to individual investor needs. The new structure also provides fund managers flexibility to match market circumstances to access capital more quickly than through a multi-year fund. The survey also found that 56 percent of fund managers expect an increase in such alternative fund structures in the coming years.
PE Fund Raising Strong in 2013
Private equities are having a strong year raising approximately $310 billion in the first nine months of 2013, a 20 percent increase compared to about $259 billion during the same period last year, according to data firm Preqin. The figure is the industry’s best nine month total since the year 2008. Funds focused on North America raised $57 billion during the third quarter and accounted for 66 percent of all private equity funds in the quarter. The average fund size continues to get smaller. During the third quarter, the average private equity fund dropped to $532 million from $696 million in the second quarter. There was sharper decrease in the average buyout fund size, which fell to $996 million in the third quarter from $1.8 billion a quarter ago.
Mining Assets, New Targets Of Private Equities
Private equity firms are eyeing opportunities in mining attracted by low valuations and the potential to scoop up undervalued assets from distressed sellers. Mick Davis, the former CEO of mining group Xstrata recently raised $1 billion to buy mining assets, half of which came from private equity TPG. Another high profile executive Aaron Regent, who was fired last year as CEO from gold miner Barrick Gold set up a company backed by private equity investors to buy assets mainly in the Americas. Roger Agnelli, former head of Brazilian iron ore producer also took private equity backing recently to look for opportunistic buys in mining.
Private equity groups that were recently looking at buying mining operations include Apollo, KKR, Blackstone, and Carlyle. According to data published by Preqin, private equity groups have raised approximately $10 billion in the last five years for funds targeting mining assets, which is more than five times the amount raised in the five years to 2007, the year private equity peaked.
Some Money Managers Remain Wary Of Increased PE Activity
While the Grant Thornton survey found growing optimism among several fund managers, some remain wary of rising private equity activity. John Bird, an investment advisor at Albion Financial Group says one in ten private equity deals might earn enough to make it worthwhile for someone. Private equity Blackstone Group’s global head Joseph Baratta says he is concerned about the continued availability of cheap money and warns “We are in the middle of an epic credit bubble, the likes of which I haven’t seen in my career in private equity”.
