Updated with clarification
Style drift in private equity is back, and some say it could be a sign that the market is topping out.
Despite a global dip in private equity fundraising overall in recent quarters, the most popular private equity managers are raising ever-larger funds that tend to make ever-larger investments. The highly sought-after, often lower middle-market or middle-market managers are having no trouble closing funds that are 30% to 60% larger than their last funds. Managers are lured — at least in part — by the management fees on larger pools of capital.
Among the new larger funds that have closed in the past 18 months are:
nComvest Partners on Oct. 14 closed its fifth middle-market private equity fund, the $893 million Comvest Investment Partners V, which exceeded its $700 million target and is 53% larger than the prior fund, the $580 million Comvest Investment Partners IV;
nFriedman Fleischer & Lowe closed its fourth fund in June with slightly more than $2 billion, exceeding the $1.5 billion target. The new fund had 33% more capital than its prior fund, the $1.5 billion Friedman Fleischer & Lowe Capital Partners III, which closed in 2008.
nKinderhook Industries LLC last year held a first and final close of its fourth private equity investment fund, the $500 million Kinderhook Capital Fund IV, exceeding its $400 million target, with 67% more capital than its prior fund.
Besides the fundraising, managers' assets are further bolstered by growing sums committed to co-investments, direct investments and separate accounts.
Larger funds need to make larger investments and can send once-upon-a-time middle-market managers further away from the kinds of investments that generated their record returns.
There is voracious demand from limited partners for high-performing middle-market funds, said Jonathan Grabel, chief investment officer for the $14 billion New Mexico Public Employees Retirement Association, Santa Fe.
Private equity funds worldwide raised a total of $385.4 billion in the first three-quarters of this year, down 1% from the first three quarters of 2014, according to data from London-based alternative investment research firm Preqin.
And investors are not just investing in funds any longer, Mr. Grabel noted. “Co-investments are changing the dynamic,” he said. “Co-investment has really taken off in a bull market cycle.”