Fund raising by global PEs dips to 5-yr low in Q3

Fund raising by global private equity (PE) funds has dipped to an over five-year low of $38 billion in the third quarter of 2009, as fund managers are refraining from making any new commitments before next year.

Fund raising in the third quarter represents a 55 per cent slump from the second quarter of the fiscal, when the PE funds had raised an aggregate $84 billion globally, according to a report by global research firm Preqin. Private equity fund raising plummeted to lowest levels since 2003, with the third quarter figures equivalent to just 45 per cent of the $84 billion raised in the second quarter, Preqin said.

“Many of the funds that are closing are doing so short of target, and we have seen a number of fund managers putting their fundraising efforts on hold until 2010, or abandoning them altogether for the foreseeable future,” Preqin spokesperson Tim Friedman said.

However, the report noted that the investment shift from the private equity asset class is only short term and the institutional investors would pull back again in the final quarter of this year and in 2010.

“Our recent survey of institutional investors in the sector would suggest that the latter is the case, with a whole swathe of significant private equity partners readying themselves to re-enter the market in the final quarter of this year and into 2010,” Friedman said.

Over the year, the aggregate fundraising target has dropped considerably, primarily due to a slowdown in the launch of fund raising programmes, plus an increase in the number of funds being abandoned.

The number of funds on road till date stands at 1,574 with an aggregate target of $754 billion, down from 1,622 funds targeting to raise an aggregate $807 billion at the end of July 2009.

“Clearly the problem is not on the supply side... Supply is still outstripping demand, with the amount of capital available for new investments significantly down on recent years as institutions remain reluctant to commit to new vehicles,” Friedman said.

So far in 2009, 90 funds have abandoned their fund raising process – a significant increase from the 30 funds abandoned in 2008 and the 14 abandoned in 2007, Preqin data showed.

“These fund raising statistics are clearly very poor, but they are not totally unexpected... Institutional investors are not making new commitments at anything close to the rate they were in previous years,” the report noted.

The average time taken by funds to achieve a close currently stands at 18 months which is nearly double the time taken in 2004 (9.5 months). “The rate of fundraising drop by nearly 70 per cent over the course of a year is a dramatic fall and demonstrates just how challenging it has become to raise new funds in the current climate,” Friedman said.