This post has been updated on July 30th 2019.
There is a “get it while you can” trend happening in private equity. Here is what you need to know.
You are aware that you need a “rainy day” fund for your personal finances. And you also likely have one for your business. But there is a growing trend in the alternative asset management world that is applying that mentality to fundraising.
The economy has been humming along nicely, but for the first time since 2008, the Federal Reserve is expected to cut rates on July 31st. Although it might appear that the economy in the U.S. is thriving, there have been concerns over current trades, which may tie into a slowing global economy. Weathering just a few bumps in the road over the past couple of years, investors, asset managers, and analysts are starting to ask themselves: How much longer can this last?
Those of us who experienced the dotcom bubble, and then the Great Recession, the question lingers not as a passing muse, but rather a warning light in the back of our minds.
Smart private equity and fund management firms are using this time of plenty to get ahead of the ballgame. As Chris Witkowsky at PE Hub puts it, they’re stashing cash “under the proverbial mattress”.
Private equity closing huge funding rounds
Big name firms like Advent and Blackstone have closed huge funding rounds this year. Advent reported closing $17.5 billion on its hard cap, posting $1.5 billion above the firm’s $16 billion goal. Meanwhile, Blackstone reported $22 billion in its latest round earlier this spring.
The interesting trend is that many fund managers are electing to save these funds for future investments. They are also coming back for more fundraising sooner than expected, dipping back into the pool to emasse a greater stash. And since they don’t start charging fees until those funds are dispersed, LPs are mostly happy to oblige.
Has fundraising peaked?
Of course, there is no way to know when we’ve hit the peak of this trend.
Some analysts argue that we’re in it now, while others predict plenty of potential for the near future. What all seem to be able to agree on is that now is the time for fund managers to get what they can while the getting is good. Whether they’re going to use the funds now or save them for a later date when the market is less favorable, now is the time to build as much as possible.
Perhaps more importantly, smart PE firms are putting more effort into planning for an eventual downturn. As the U.S. and global economy steams into one of its longest running expansion periods, many are predicting a slow down in the near future. Managers are looking at the data and learning from the mistakes and successes of the last recession to help them plan ahead with investments in recession-resistant industries.
What does all this mean for your firm?
The data seems to suggest that what all this means for you has a lot to do with the size of your private equity firm and the amount of capital it manages. Smaller firms are getting a bit more pinched, as the “big guys” are going out to raise more funds faster than before, are successfully capturing a big share of the capital, and then are stashing it away for a later date.
But for a private equity firm of any size, building relationships and data management are key to competitive advantage. Those that have modernized their fundraising and communication processes are experiencing better results overall.
“It helps us to look at our data in a different way. We had been looking at a very high level and now we are able to break it down and be more specific. We have more accurate and more meaningful data — we can see everything more real-time. We are a lot more efficient,” explains one private equity VP.
Integrating a data management and/or CRM system built for private equity firms will not only provide your team with a competitive advantage now—while the market is hot. It will also pay dividends into the future in improved decision making, more efficient use of time and data, LP satisfaction, and more.