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Private equity fundraising plummets to lowest levels since 2003

Funds holding a final close in quarter three 2009 raised aggregate capital of USD38bn, just 45 per cent of the USD84bn raised in quarter two 2009, according to a report by Preqin.

In comparison with the recent record breaking quarters seen in 2007, the drop is even more steep with Q3 2009 figures equivalent to just 18 per cent of the record USD208bn raised in Q2 2007.

The number and aggregate fundraising target of funds in market has dropped considerably over the course of the year, which Preqin says is due primarily to a slowdown in new fundraising launches, plus an increase in the number of funds being abandoned or put on hold.

To date in 2009, Preqin has data showing that up to 90 funds have abandoned their fundraising process – a significant increase from the 30 funds abandoned in 2008 and the 14 abandoned in 2007.

Further evidence of the challenging nature of the fundraising market can be seen in the time it is taking for fund managers to close their vehicles. For funds closed in 2009, the average time spent in market has jumped to 18 months, a significant increase from recent years.

Preqin says the results are not totally unexpected: it has already seen that institutional investors are not making new commitments at anything close to the rate they were in previous years. Preqin’s August 2009 survey of 100 institutional investors showed that just 41 per cent of LPs had made fresh commitments to funds in the first six months of the year and these investors are, in general, investing at a much slower rate and to fewer funds than they have in the past.

Although conditions have been extremely challenging in Q3, Preqin has seen strong evidence to suggest LPs will be returning to the asset class soon. In its August survey more than half of investors, 54 per cent, said they expected to make new fund commitments in the latter half of 2009, and a further quarter said they expected to return to the market in 2010.

Overall, investor appetite for private equity does not generally appear to have been adversely affected by the financial crisis. In fact, 30 per cent of investors said they intend to increase their allocations to private equity over the longer term and a further 63 per cent intend to maintain the existing level of their exposure. Just six per cent of investors are intending to decrease their exposure to private equity over the next three to five years.

Tim Friedman, head of communications at Preqin, says: “Historical data shows that the summer months of Q3 often represent a relatively slow quarter for fundraising in any given year. However, for the rate of fundraising to 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. 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.

“Clearly the problem is not on the supply side – although we have seen the number of offerings on the road drop significantly over the course of 2009, 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. The question for the industry is whether current sentiment is indicative of a long-term shift away from private equity, or whether it represents a short-term hiatus. 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 LPs readying themselves to re-enter the market in the final quarter of this year and into 2010. Nonetheless, private equity fundraising is set to remain challenging, and we expect firms without a strong track record to continue to struggle in gaining commitments from a more wary investor community.”

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