Private equity investors should see more new firms spring up as executives leave established firms to strike out on their own in 2019.
The coming year should also see more private equity firms selling minority stakes in their firms as a way to raise cash to build their businesses, as well as middle-market firms supersizing their funds, observers said.
At the same time, macroeconomic factors, such as trade wars and rising interest rates, could dampen exits, especially through mergers and acquisitions. Meanwhile, managers are expected to continuing adding credit to their lineup of investments not only to satisfy investor demand for income but also to create a source of private equity deal flow, industry insiders say.
"This is a very full market cycle," said Steve Rosen, Cleveland-based CEO of private equity firm Resilience Capital Partners. "Some industries are on their way up. Some companies are still performing well and hitting highs. But capital structure matters more now than when you are in the beginning of an upcycle."
First funds raised by new private equity firms worldwide totaled $35.9 billion raised by 278 funds in 2018 through Dec. 13, from $57.9 billion raised by 440 the year before, according to London-based alternative investment research firm Preqin.
More new firms formed by private equity executives leaving established firms should come to the market with their first funds in 2019, said Sanjay R. Mansukhani, senior manager research consultant in the New York office of Towers Watson Investment Services Inc., a subsidiary of Willis Towers Watson PLC.
The reason is that it is a good time for private equity because it could provide better returns than public equities, and investors have capital available and interest in investing in private equity, Mr. Mansukhani said. These factors have shortened the time it takes to raise a fund.
Indeed, the average time spent to raise a fund dipped to 15 months for funds raised in the first three quarters of 2018 from 16 months in all of 2017, Preqin data show. Not only are funds closing quicker but most (71%) met or exceeded their fundraising targets in the first three quarters. Some 30% of funds exceeded their fundraising targets by 125% or more in the same period.