Private equity fund-raising activity is now showing signs of improvement. According to Preqin, a research house which tracks PE fund-raising globally, said, nearly $50.4 billion was raised in Q1 2010, representing a 5% improvement from the previous sequential Q4 2009.

However, fundraising is still occurring at a slow pace, and it is taking longer for the improving global economic conditions to translate into an improved fund-raising market than many expected. The research house added that it anticipates a more substantial recovery in fund-raising for Q2 2010.

A major factor driving fund-raising is the cash-flow situation for limited partners in private equity, such as pension plans and endowments. Investors have experienced a significant reduction in the levels of capital being called up and distributed from existing investments when compared to recent years. (Capital calls are requests for additional money required of investors to fund a deficit.)

Whereas in 2004–2007 the level of capital being called up and distributed was relatively evenly weighted, and, for buyout funds in particular, there was actually far more capital being distributed than called up, the past two years have seen the level of capital being called up far outweighing capital distributions.

With the amount of uninvested cash being high, investors have more capital sitting in existing investments than originally anticipated, and have less capital to commit to recycle into new vehicles. Investors are now getting skewed towards those funds which are more exit-focussed and have been able to show a decent track record.

The note added that despite a rally in public markets causing the denominator effect that many LPs were experiencing in early 2009 to ease, a combination of slowing cash-flow and general uncertainty towards the market dampened investor appetite in late 2009 and early 2010.  A recent survey by the research house conducted in December 2009 reveals that investor sentiment is improving, with 51% of investors set to be investing more capital to private equity in 2010 than 2009, with only 8% anticipating a reduction.

“There are a large number of funds on the road which have held interim closes (642 vehicles seeking $309 billion in total) which indicates a good momentum in the market, and we do anticipate a further rise in fund-raising for Q2 2010. However, for fundraising to improve more dramatically, investors will need to see more in the way of profitable exits in order to both improve their cash flow positions and also to build confidence towards the profitability of the asset class,” said Tim Friedman, company spokesperson, Preqin.

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