Fundraising still moving at slow pace

Fundraising activity continued at a slower pace in the first quarter of this year, achieving a slight improvement over the fourth quarter of last year, according to a Preqin study.

Private equity companies raised $50.4 billion (Dh184.96bn)?in the first quarter of this year from 79 final fund closures.

Preqin said it is taking longer for the improving global economic conditions to translate into an improved fundraising market than many expected. It anticipates a more substantial recovery in fundraising for Q2 2010. The number and aggregate fundraising target of funds in the market have dropped considerably over the course of the last year, which is due primarily to a slowdown in new fundraising launches, plus an increase in the number of funds being abandoned or put on hold.

For funds closed in 2010, the average time taken was 19.1 months, over double the average time taken in 2004.

A major factor driving fundraising is the cash-flow situation for limited partners (LPs) in private equity, such as pension plans and endowments. The levels of capital being called up and distributed to investors reveal that investors have experienced a significant reduction in the levels of both capital being called up and distributed from existing investments when compared to recent years.

However, in 2004-2007 the level of capital called up and distributed was relatively evenly weighted, and for buyout funds in particular there was actually far more capital being distributed than called up.

The past two years have seen the level of capital being called up far outweighing capital distributions. As a result, investors have more capital sitting in existing investments than originally anticipated, and less capital to commit to recycle into new vehicles as a result.

Despite a rally in public markets causing the denominator effect that many LPs experienced in early 2009 to ease, a combination of slowing cash flow and general uncertainty towards the market dampened investor appetite in late 2009 and early 2010.

However, a Preqin survey conducted in December 2009 revealed investor sentiment is improving, with 51 per cent of investors set to be investing more capital to private equity in 2010 than 2009, with only eight per cent anticipating a reduction. Tim Friedman of Preqin said: "Although the private equity fundraising market has seen a slight improvement when compared with Q4 2009, the results for Q1 2010 are still very low historically, and conditions remain extremely challenging for fund managers seeking commitments for new vehicles.

With more capital being called up than distributed, investors are not having to invest at the same pace as in previous years in order to maintain their allocations to private equity.

In addition, while confidence is returning to the market, investors are still exhibiting increased caution when making new investments.

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