Following on my last post regarding the new PE Index Introduced by the PEGCC see the chart below highlighting the industry's post-recession rebound. The index does a nice job of merging 4 factors of private equity activity into a single indicator. Here is a chart of the index going back to 2001.
The Private Equity Council has come out with a new tracking index for private equity. The index is based on four factors: total equity investment; transaction volume; fundraising; and the dollar value of exits. The best thing about the index is that it can be used in place of many of the misleading (when taken alone) indicators of private equity industry health such as transaction unit volume and transaction dollar volume.
If the IPO pipeline is an indicator of things to come (and it is) then the latest data from PwC should provide some needed optimism. In Q3 there were 32 IPOs completed raising $4.8 billion compared to 20 IPOs with a value of $5.8 billion in Q3 2009. Don't worry about the dollar volume the unit volume is the important number. The majority of the new IPOs are private equity led which points towards improving liquidity for funds divesting of portfolio companies. A frothy IPO market is also an indicator of a good private market. With liquidity comes divestitures which leads to LP distributions. Cash-on-cash returns improves fundraising which allows LP's (with the cash from distributions) to commit capital to new funds.
Billion dollar deals are back in favor with PE investors. In the last two years, there have been 34 deals valued over $1 billion dollars, according to the PitchBook Platform. 25 of those deals are from this year, a significant jump from the 9 deals for all of 2009. The increase in billion dollar deals is largely driven by two things: the renewed availability of debt for buyouts and the current $425 billion capital overhang for $1 billion+ PE funds. $10 billion deals may still not be possible but $5 billion deals definitely are for the right companies, and with the investment period for many of these large funds ticking down, it is likely that this trend will continue.
During the third quarter of 2010, 81 private equity funds worldwide reached a final close, raising an aggregate $57 billion, a small increase from the $49 billion raised in Q2 2010. It is clear that fundraising remains extremely challenging, and is occurring at a fraction of the rate that the industry was seeing in 2006 – 2008. Nevertheless fundraising conditions will continue to improve in Q4 2010 and beyond.
“Although our figures show fundraising reaching a low point this year, much of the capital raised by funds achieving a final close in 2009 was actually committed prior to the financial downturn, with very little capital being committed in 2009 itself. We are now starting to see funds close which raised most or all of their capital post September 2008, showing that private equity investors remain confident towards the asset class and its ability to produce returns in the current financial climate,” said Tim Friedman of Preqin. “Based on our conversations with institutional investors around the world, placement agents and fund managers, we are predicting that conditions will continue to improve slowly in 2010, with a more dramatic rise coming in 2011. We are projecting total fundraising for 2010 to reach around $260 billion by the end of the year.”