PitchBook Better Data. Better Decisions. PitchBook. Fundraising Report. 2H 2012 Edition. Presented by: The World s Workplace

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1 Better Data. Better Decisions. PitchBook Fundraising Report 2H 2012 Edition Presented by: The World s Workplace

2 Table of Contents Introduction from RR Donnelley Private Equity Fundraising Activity Fundraising Trends by Quarter and Year Fundraising by Fund Size Average Fund Size Average Commitment Average Fund Step-Up Average Time to Close Average Time Between Funds League Tables ii COPYRIGHT 2012 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. i

3 Introduction from RR Donnelley Capital is the lifeblood of private equity (PE), but the inflow of money into PE funds has slowed considerably as a recent imbalance between funds raised and deals executed has resulted in an ample supply of dry powder. Record-breaking fundraising witnessed in 2007 and 2008 was followed by a dramatic slowdown in the number of deals in the post-crisis era, which has reduced the need to raise more capital. To that end, the average size of successor funds has dwindled and the average time between funds has increased from 3.8 years in 2008 to 4.8 years in 1H While fundraising totals in 2012 are on par with 2011, there are several developments that bode well moving into the future. PE firms closed 40 funds with a total of $42 billion in 2Q 2012, the second best quarterly total in the last three years. Since dropping a precipitous 51% from 2009 to 2010, average fund sizes have continued to rebound and now sit at $894 million. Limited partners (LPs) have exhibited their faith in the PE industry and recent vintages by upping the average fund commitment 60% from 2010 to 1H In addition, the average time to close a fund dropped significantly to 13.1 months in 1H 2012 after staying persistently high at around 18 months for the last two years. From 2009 to 2011, U.S.-based PE firms raised an average of $122 billion annually, less than half of the totals seen in 2007 and These reduced levels of fundraising have caused the capital overhang to shrink by more than $100 billion, from $576 billion in 2008 to $432 billion in 1H Now that the dry powder is beginning to diminish, it appears that firms may be ready to hit the fundraising trail once again. As of August 31, 2012, there were 295 open buyout funds in the U.S. targeting an average of $987 million in commitments. Investing activity has far outstripped fundraising in recent years in order to reduce the capital overhang, but this trend will obviously have to reverse at some point. Now that PE firms have taken steps to reduce the massive capital overhang that developed in the middle of the last decade, it will be interesting to see how fundraising trends develop moving forward. While average fund sizes have been on the rise, most observers doubt that we will see a return to the pre-crisis era characterized by mega-funds with more than $5 billion. Instead, it is expected that firms will redouble their efforts on vehicles with $1 billion to $5 billion, which will concentrate their investments on the upper middle market instead of mega-deals. This report contains indepth data and charts that highlight the most recent fundraising activity, as well as analyses and insight into emerging trends and the future of PE fundraising. RR Donnelley is a global provider of integrated communications. The company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, drive top-line growth, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide pre-media, printing, logistics and business process outsourcing services to clients in virtually every private and public sector. Venue is a secure online workspace with a powerful feature-set and an intuitive design that allows you to easily organize, manage, share and track all of your sensitive information. Venue data rooms provide complete control, ensuring that you can manage who has access to your data room, which documents they see, and how they can interact with those documents. Venue data rooms are backed by RR Donnelley, a $10.6 billion corporation with more than 600 locations and nearly 60,000 employees worldwide. RR Donnelley s total revenues are larger than all other virtual data room providers combined. Whether you re conducting due diligence for a merger, raising capital, or developing a document repository, Venue is the ideal virtual workspace for managing critical information. ii

4 Private Equity Fundraising Activity $ Fundraising by Quarter $ $80 $ $ $ $0 $100 $78 $84 $55 $99 $94 $74 $41 $75 $36 $12 $30 $29 $22 $25 $11 $50 $29 $22 $23 $20 $42 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Through the first half of 2012, PE firms are on par with their fundraising efforts from After a dreary 1Q, which saw 29 funds hold a final close on an aggregate $20 billion, firms redoubled their efforts, raising $42 billion through 40 funds in 2Q 2012, the second best quarterly total in three years. Even though 2Q 2012 looks strong compared to recent figures, it pales in comparison to the numbers put up before the financial downturn. Fundraising has been muted since 2009, due in large part to lower levels of investment. The steep dropoff in fundraising coincided with a rapid decrease in deal-making. In 2007, PE firms averaged 759 deals per quarter; in 1H 2012, that number had been cut by more than half to 333 deals. The subdued levels of fundraising seen in recent years have played a crucial role in chipping away at the capital overhang, which peaked at $576 billion in 2008 and now sits at $432 billion. However, more than $100 billion of the dry powder comes from 2008 vintage funds, which are reaching the upper end of their investment window. Competing forces have created a mixed climate for fundraising. As capital continues to be tied up in older vintage funds, one would expect fundraising to remain muted in the near-term. However, firms have experienced more success in their fundraising efforts as of late; funds are closing in less time with more capital and attracting larger LP commitments. Plus, there are currently 295 open buyout vehicles in the U.S., which would seem to suggest an imminent increase in fundraising activity. Capital Raised ($B) 1 # of Funds Closed One emerging trend that is worth noting is the increasing prevalence of separate accounts for the largest LPs. Unlike a traditional private equity fund that has numerous LPs, a separate account is created exclusively for a single LP. Separate accounts can provide LPs with a host of benefits, including lower management fees, closer involvement in the investment process, and a tighter alignment of interests with the general partner (GP). Due to the high level of customization of these funds, they are typically reserved for the largest LPs that can afford to allocate hundreds of millions of dollars at a time. $350 $300 $250 $200 $150 $100 $50 $0 265 Fundraising by Year $223 $318 $308 $154 $88 $124 $ Capital Raised ($B) # of Funds Closed

5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Fund Count by Size Capital Raised by Size $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M $5B+ $1B-$5B $500M-$1B $250M-$500M $100M-$250M Under $100M The most noticeable change in PE fundraising in recent years has been the shift away from mega-funds, defined as funds with at least $5 billion of committed capital. Mega-funds represented 47% of the capital raised across all of PE in 2008; now they account for just 10%. From 2006 to 2009, mega-funds averaged $102 billion in commitments per year, and these vehicles still hold more than $100 billion in aggregate. Since 2010, average annual commitments to mega-funds have plummeted to $9 billion, as PE firms have been able to close just two such vehicles. The future does not look much brighter for mega-funds, as only two such buyout vehicles are currently open. The drop in fundraising is largely due to the lack of $5B+ funds. With the dearth of mega-funds, LPs have been turning to the slightly smaller $1 billion to $5 billion fund range, which has grown from 36% of the capital raised in 2008 to 63% in 1H Another noticeable change in the fundraising landscape has been the downtick in funds with less than $100 million, which have fallen from 26% of all PE funds in 2010 to 13% in 1H The lack of the smallest and largest sized funds will place even more focus on the middle market, which already represents about three of every five PE deals. Largest Funds Closed in 1H 2012 Firm Leonard Green & Partners GSO Capital Partners Mount Kellett Capital Management American Securities Natural Gas Partners Fund Green Equity Investors VI GSO Capital Opportunities Fund II Mount Kellett Capital Partners II American Securities Partners VI NGP Natural Resources X Fund Type Mezzanine Fund Size ($M) $6,250 $4,000 $4,000 $3,640 $3,586 2

6 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- Average Fund Size ($M) $1,151 $925 $739 $688 $966 $588 $843 $441 $427 $1,565 $1,299 $1,122 $1,119 $873 $1,084 $602 $894 $783 $562 $545 $567 $534 $360 $ Funds All PE Funds % 2.9% 3.6% 3.6% 4.1% 3.9% 3.5% 3.8% $41 $44 $50 $62 $65 $45 $54 $ Average Commitment Size ($M) The average size of buyout funds has continued to rebound following the nadir of 2010, more than doubling from $534 million in 2010 to $1.12 billion in 1H All types of PE funds recovered nicely as well, albeit at a slower pace, with the average fund size rising from $602 million in 2010 to $894 in 1H in As mentioned previously, megafunds have proven difficult to raise in the years following the financial crisis, which may appear contradictory to the increase in average fund size. However, two main factors have been driving up the average fund size. First, there has been a noticeable lack of vehicles with less than $100 million, which have dropped from 26% of funds closed in 2010 to 13% in 1H In addition, Average LP Fund Commitment Average Commitment/Fund Size 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% since falling to $45 million in 2010, the average commitment from institutional LPs has jumped 60% to $72 million in 1H After declining for two straight years, the average proportion of a fund committed by an individual LP has reversed course in 1H 2012 and now sits at 3.8%. With the current lack of mega-funds, large LPs will have to make larger relative contributions to smaller funds in order to meet their target allocations to PE. LPs that make large, early commitments will likely have the ability to dictate more favorable terms. Now that they have recovered from their post-crisis lows, fund sizes should begin to plateau for several reasons. First, the financial bubble is still vivid in the minds of LPs, and investors are being even more cautious in their due diligence and commitment decisions. In addition, PE firms already have more than $432 billion in dry powder available to invest. While this number has fallen recently, many LPs still have substantial sums tied up in PE funds and GPs will inevitably be concentrating on sourcing deals instead of raising new funds. 3

7 A strong indicator of the voracity of the PE industry is the step-up in size from one fund to the next. Firms that have experienced success typically try to expand, and LPs tend to be ready and willing to commit capital with a proven team. The two accompanying graphs compare subsequent funds from the same family (i.e. XYZ Fund III and XYZ Fund IV). During the boom years, PE firms regularly raised funds that were at least twice as big as their predecessors. While most follow-on funds continue to be larger than their forerunners, the size of the increase has shrunk considerably. Funds between $250 million and $1 billion in 1H 2012 were just 35% bigger than their precursors. Despite being on an upward trajectory for the last two years, new funds with more than $1 billion are experiencing similar difficulty and are just 56% larger than their predecessors. No clear pattern emerges when looking at funds with less than $250 million in committed capital. The average step-up percentage has seesawed in recent years and is currently on the upswing. In 1H 2012, the 180% 160% 140% 120% $1,400 $1,200 $1,000 $800 $600 $400 $200 $- 74.0% 87.3% average step-up for these funds jumped to 84% from just 26% in When looking at the step-up in fund size, it is important to keep in mind when the previous fund was likely to be raised. With the average time between funds now at 4.8 years, the previous fund was likely raised in the middle of the investing boom of the mid-2000s, when average fund sizes were either at Average Fund Step-Up 104.4% 101.8% 113.0% Average of Previous Fund Size Average Step-Up by Fund Size 102.0% 48.9% 50.0% 47.6% Average of Fund Size ($M) 48.3% or approaching their peaks. As such, the moderate step-ups in subsequent funds currently being raised should not be surprising. Even though the stepups are relatively small on a historical basis, it s important to remember that subsequent funds are still significantly larger than their forerunners, which indicates strong performance and is a decidedly positive sign for the industry. 100% 80% 60% 40% 20% 0% % 55.9% 35.4% Under $250M $250M - $1B $1B+ 4

8 Months Average Time to Close Prior to the financial downturn in 2008, investors were clamoring for the opportunity to invest in PE as virtually all aspects of the industry were flourishing. PE firms had little trouble wooing LPs, with the average 2006 vintage buyout fund closing with more than $900 million in capital commitments in less than 7.5 months. Funds All PE Funds After the meltdown, turmoil in financial markets and unprecedented levels of uncertainty quickly turned the table, as the average time to close a buyout fund shot up to 17.9 months in The trend has finally reversed itself in In the first half of the year, the average buyout fund took just 13.2 months to close, the shortest timespan since Another positive sign for the PE industry is that shorter fundraises allow GPs to focus their time, energy, and resources on deal-making instead of raising capital. The shorter time to fundraise also underscores the improved fiscal position of LPs, who are now making the largest average commitments on record. PLATFORM HIGHLIGHTS Competitive Advantage Comprehensive Coverage PitchBook s fund data includes detail-intensive drill-downs on returns, portfolio companies, lead partners on deals, limited partners, service providers, and much more. Rigorous Research All of PitchBook s data goes through a rigorous multi-stage cleaning (secondary research) and validation process (primary research) to ensure its accuracy. Transparent Data PitchBook s data is fully transparent, allowing users to see where the data has been sourced, accompanied by complete sets of quarterly and annual historic returns. Advanced Analytics PitchBook s powerful analytics and charting tools allow users to customize information for individual purposes (cash flows, IRRs, cash-on-cash multiples, and/or fund dry powder for both individual funds or customized groups of funds). PitchBook Platform Data Tallies 1 Companies Transactions Professionals Investment Firm Professionals Investors (Financial & Strategic) Investors (PE & VC) Funds Funds with Returns Open/Upcoming Funds Service Providers Limited Partners % Funds with Dry Powder Funds with Cash Flows Funds with IRR 1 All Pitchbook data sourced from the PitchBook Platform as of 8/8/12. 53,842 82, ,189 89,141 20,833 9,989 16,590 5,565 2,996 7,939 6,625 70% 4,104 3,324

9 The amount of time a PE firm takes between fundraising can be indicative of the current investing climate, as firms that are able to efficiently deploy capital and realize strong returns will inevitably find themselves back on the fundraising trail sooner. To that end, the fact that the average time between funds has hit a new high of 4.8 years should give industry professionals cause for concern. Many private equity investors were pushed to the brink during the financial crisis, with 427 firms failing to raise a fund in the last five years. Of that group, just 81 are actively raising capital for a new fund. The amount of time between fundraising efforts has been increasing for all PE funds, but the smallest funds are experiencing the most trouble. The average time between fundraises for vehicles of less than $250 million has increased 34% since 2009 and now sits at 5.8 years. Larger GPs appear to be having slightly more success, with just 4.1 years between fundraising efforts for vehicles in excess of $1 billion. However, this is still the largest gap between fundraises since Years Years Average Time Between Funds A major reason for the increased time between fundraising efforts is that it is taking more time for PE firms to realize investments. The median holding period for a portfolio company, which was less than 3.5 years in 2007, has now crept up to 5.3 years. GPs that still have a surfeit of portfolio companies understandably need to concentrate on achieving solid returns from older vintage funds before they Average Time Between Funds by Size can solicit LPs for more capital. Much of the bottleneck has been caused by the rampant fundraising that occurred just prior to the financial downturn. PE firms raised a total of $626 billion in 2007 and 2008 only to experience a harsh investing climate in the ensuing years. As such, 2007 and 2008 vintage funds still have more than $160 billion in dry powder, leaving little incentive to raise new capital Under $250M $250M - $1B $1B+ 6

10 League Tables Firm Kohlberg Kravis Roberts Highstar Capital The Blackstone Group Vestar Capital Partners THL Credit AEA Investors Evercore Partners Jefferies Capital Partners RedZone Capital Siris Capital Solaia Capital Advisors Black Diamond Capital Management Kohlberg Kravis Roberts Milestone Partners Dominus Capital Fund Select Open Funds (as of 9/7/12) Fund KKR - North American XI Fund Highstar Capital IV Blackstone Infrastructure Fund Vestar Capital Partners VI THL Credit Partners AEA Investors Fund V Evercore Capital Partners III Jefferies Capital Partners V Redzone Capital Fund II Siris Partners II Solaia Capital Advisors Fund I BDCM Opportunity Fund II B KKR Lending Partners Milestone Partners IV Dominus Capital Fund I Fund Type Infrastructure Infrastructure PE Growth Distressed Debt Debt Fund Target Size ($M) $10,000 $5,000 $5,000 $4,000 $2,500 $2,000 $1,000 $800 $750 $600 $600 $500 $500 $450 $350 Top 20 Placement Agents by Capital Raised since 2011 Top 20 Placement Agents by Funds Serviced since 2011 Park Hill Group Lazard MVision Private Equity Advisers Credit Suisse UBS Atlantic-Pacific Capital Citigroup Global Markets Merrill Lynch Pierce Fenner & Smith Barclays Capital Madison Williams & Company Eaton Partners Probitas Partners Pinnacle Trust Partners Evercore Private Funds Group Fortress Group RBC Capital Markets Bhargava Wealth Management Southridge Investment Group Raymond James & Associates Guggenheim Partners Park Hill Group Credit Suisse Lazard MVision Private Equity Advisers Atlantic-Pacific Capital Eaton Partners Pinnacle Trust Partners UBS Evercore Private Funds Group Probitas Partners BerchWood Partners Ariane Capital Partners Phoenix Capital Resources Thomas Capital Group RBC Capital Markets Fortress Group NovaFund Advisors Gladstone Capital Beacon Hill Financial Greenhill & Co. 7

11 82,502 20,833 53,842 7,939 6,625 16,590 Deals Investors Companies Service Providers Limited Partners Funds Want the whole pie? PitchBook tracks more Private Equity and Venture Capital data than anyone. All PitchBook data sourced from the PitchBook Platform as of 8/8/2012 PitchBook Private Deal Comps Targeted Business Development Sourcing New Deals Targeted Buyers Lists Benchmarking Funds & IRR Public Company Fundamentals PitchBook Corporate Headquarters 1201 Alaskan Way, Pier 56 - Suite 200 Seattle, WA 98101

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