Heated competition to get into top private-equity funds is leaving some investors out in the cold.
A Wall Street Journal report noted that pension funds, endowments and wealthy individuals that invest with private equity are finding it increasingly hard to get into the most sought-after funds.
Accordingly, the report noted that private-equity firms, which raise money from such investors and then put it to work in various investment strategies, are generally filling their coffers faster this year from clients.
The proportion of private-equity funds that reached or exceeded the maximum amount the firms set out to raise this year is at its highest level since at least 2009, according to a snapshot of funds for which private-equity tracker Preqin has data.
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Private-equity firms returned $444 billion to investors in the first half of the year, according to Preqin. That figure puts 2014 on a path to beat the record $568 billion in distributions in 2013. US private-equity funds delivered investors net annualized returns of 14.26 percent in the 10 years ended June 30, according to investment advisory firm Cambridge Associates LLC, beating the S&P 500’s roughly 7.8 percent annualised gain over the same period.
Typically, firms put a limit on the size of the fund they are raising, known as a hard cap, at the beginning of the fundraising process. That hard cap generally can’t be exceeded without approval from fund investors.
As of November 13, 55 percent of roughly 280 funds for which Preqin had hard-cap data reached or surpassed that maximum size. Last year, 43 percent of funds hit or exceeded those limits.
Also, private-equity firms have taken an average of 16.4 months to raise capital for funds that have closed this year, Preqin data show. That’s two months shorter than the average time it took to raise funds that closed in 2013.
“The number of quick fund closings has been especially pronounced this year,” said Cathy Konicki, a partner at investment-consulting firm NEPC LLC.
