Sizing the Middle Market
The volume and velocity of private equity fundraising has understandably received significant attention over the course of 2017, but the impact of these tailwinds on the middle market requires some additional analysis. According to our research approximately 135 buyout funds have successfully held final closes this year and have closed, in aggregate, over $144 billion in fund commitments. Impressive numbers to be sure, but what lies behind the headlines is what’s more interesting. In the table below, a breakdown of the fundraising numbers reveals that funds that closed on more than $500 million, while representing a relatively small portion of the market (36 funds, or slightly more than 25%), represented an outsized amount of the $144 billion raised (nearly 90%). In order to extract the maximum value from these numbers we shifted our focus from the outliers (largest and smallest funds) choosing to drill down into a cross-section of the fundraising landscape where we have significant experience: sponsors who have raised between $500 million and $1 billion in their most recent fundraise (highlighted below).
Sixpoint believes that firms in the “sweet spot” of the middle market represent some of the best private equity sponsors (e.g. extensive track records, established teams and proven investment strategies), but these firms also face one of the most competitive sub-segments of the fundraising environment. Only 16 of the 135 funds that closed this year were in this group and they attracted a little over 8% of the total final close capital amounts at just under $12 billion. What also stood out in the data was that these funds were leaders in two significant and highly correlated categories: (i) the time it took them to complete their fundraise; and (ii) their use of a third-party advisor. Funds between $500 million and $1 billion only took an average of 3.3 months in market while their peers took closer to a year from launch to final close. One key driver appears to be their much higher than average use of an advisor; while only 51% of the $250mm to $500mm used an advisor their peers in the highlighted category engaged an advisor 81% of the time.
One explanation for this is that as firms graduate from the lower end of the middle market and start to graduate to larger funds the depth and breadth of institutional relationships required to make this leap often exceeds the capacity of groups with even outsized rolodexes. Of course, funds can be successful without an advisor, but what is required is to ensure reaching the hard cap in an efficiently run process is an institutional approach. Where the sponsor/advisor relationship has had maximum effect is when it has worked as a two-step function over the course of time. In these circumstances, step one involves the sponsor leveraging the marketing and distribution resources of the advisor to access institutional investors previously out of reach. Once the firm has reached sufficient scale, step two consists of the advisor working with the sponsor to develop an in-house group with the capability and quality to execute an institutional raise independently. Too often sponsors will look to their old fundraising playbook when it no longer fits their new set of circumstances.
Simply put, proper preparation around timing and messaging is critical in this part of the market to maintain an advantage over other groups and to achieve fundraising objectives.
Next on 60 Seconds with Sixpoint: How to Best Position Your Edge in the Market
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).