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Private Equity Funds Year-in-Review – A Lookback at 2017 and the Outlook for 2018: International Private Equity Funds

With the accelerating growth in the global economy generally through 2017 and into 1Q 2018 — including tightening restrictions in some major sectors, such as China; declining opportunities in other sectors, such as the Middle East; and weakness in the UK outlook due to the uncertainties associated with Brexit — we are seeing traditional private equity investors in Asia and Europe, as well a sovereign wealth funds in the Middle East, looking farther afield for opportunities for deployment of their burgeoning cash reserves and a concomitant expansion of the varieties of alternative investment products being offered.

For example, some established Asian private equity fund managers that, until recently, had not looked beyond Asia for investment opportunities in the belief that the “Asian Millennium” would see Asian emerging economies experience the most future growth in an otherwise sluggish global economy, are now beginning to look to opportunities in the United States and Europe for stable growth private equity investments. Moreover, in 2017 and early 2018, we are seeing an increasing number of first-time private equity funds setting up shop in Singapore and the Cayman Islands for managers based in Singapore, Hong Kong, and, to a lesser extent, Tokyo, sourcing capital from those jurisdictions as well as China, Malaysia, and Indonesia. We have also seen private equity investment in India reach a record high of US$24.7 billion in 2017, reflecting a 50 percent increase in average deal value. At the same time, Indian private equity investments also generated record exit values of US$12.5 billion, exceeding the previous 2015 high by 40 percent. [1] This expansion is expected to continue in 2018 and beyond.

According to a Preqin survey conducted in December 2017, 53 percent of institutional investors globally plan to increase their allocation to private equity over the long term, and only 4 percent anticipate a decrease in their private equity allocation. Along with allocations to private debt (54 percent of investors plan to increase their allocations to this asset class) and infrastructure (55 percent of investors plan to increase their allocations to this asset class), private equity is positioned to experience the greatest growth of any asset class in the coming year, by far outstripping all other classes in global aggregate assets under management (US$2.829 trillion as of June 2017; private debt is the closest competitor at US$638 billion) and capital raised (US$453 billion during 2017; the closest competitor is again private debt, with US$107 billion in the same period). [2]

Notwithstanding a record-breaking year in 2017 for private equity fundraising, analysts believe that the battle for capital will remain fiercely competitive in 2018, with a record 2,296 private equity funds in the market as of January 2018 seeking an aggregate US$744 billion in capital, a 26 percent increase in the number of vehicles raising capital, and a 49 percent increase in the amount of capital targeted, over January 2017. Asia is second to the United States in regional density, with over a third of the capital sought (US$266 billion) and seven of the 10 largest funds seeking capital. Europe-focused funds accounted for US$99 billion and the rest of the world (aside from the United States) accounted for US$12 billion. [3] In addition to the competition for capital, deal flow is anticipated to be a major concern for managers in what is shaping up to be a flush market in 2018.

Managers and investors in Europe, Asia, and the Middle East are watching their counterparts in the United States for new developments in investment structures and trends in asset class allocations. One such trend is the longhold private equity fund (closed-end private equity funds with terms of 15–20 years and falling into one of two strategic categories: extended-life buyout vehicles, and low-leverage, low-IRR, cash flow-generating vehicles), which some analysts believe may provide a differentiated sourcing model and return profile attractive to middle-market managers seeking to expand the scope of their portfolios and hold their key sponsors to longer-term, more reliable relationships. Such innovative structuring is less prevalent among managers operating outside the United States than among the largest global managers with operations in the United States (some analysts [4] estimate that approximately US$20 billion has been raised for longhold vehicles by some of the largest private equity managers over the past several years), but foreign managers are monitoring developments. In Asian countries in particular, the longhold structure is compatible with societal attitudes toward investment generally and could potentially see acceptance as a viable private equity strategy. Moreover, in India, there has been an increased focus on buyouts, particularly in the real estate, technology, and financial services sectors, driven in part by the interest of pension and sovereign wealth funds in control transactions.

Overall, apart from the few pockets of uncertainty noted above, the outlook for international private equity is generally one of steady growth, with concomitant expansion in geographic focus and increased innovation in investment vehicles and products.

[1] Figures from PWC and Venture Intelligence.

[2] Figures from Preqin 2018 Global Private Equity and Venture Capital Report.

[3] Figures from Preqin 2018 Global Private Equity and Venture Capital Report.

[4] Credit Suisse Private Fund Group.

Copyright 2020 K & L Gates


About this Author

Bruce MacLennan, KL Gates Law Firm, New York, Investment Law Attorney

Bruce MacLennan is a lawyer in the KL Gates New York office and a member of the Investment Management, Hedge Funds and Alternative Investments practice group. Mr. MacLennan counsels clients on complex international business transactions, with a focus on the structuring and formation of private investment funds, including private equity, real estate, venture capital and hedge funds, as well as unique investment vehicles. In addition, he advises investors on their private fund investments, funds on portfolio transactions, and fund and non-fund clients on private equity and...

Todd Betke, KL Gates Law Firm, Washington DC, Investment Law Attorney

Todd Betke is a lawyer in the KL Gates' Washington, D.C. office, where he is a member of the investment management, hedge funds and alternative investments practice group. He is also a member of the India practice group. Mr. Betke focuses his practice on the commercial, legal and regulatory issues associated with private equity, venture capital and hedge fund formation, and related acquisitions and dispositions of portfolio companies and assets. He has served as outside counsel to dozens of funds over the course of his 20-year career, and has extensive experience with the formation, regulation and operation of varying types of funds, including Small Business Investment Companies licensed by the U.S. Small Business Administration.

Mr. Betke also has a strong background in general corporate matters and has advised clients in connection with a wide range of transactions and corporate governance matters in the United States and, in cooperation with local counsel, foreign markets, including Colombia, India, China, Poland, Hungary, the Czech Republic, Romania, Lithuania, Latvia, Estonia, Russia, Ukraine and the United Kingdom. He has also worked extensively with clients and local counsel in connection with the structuring and establishment of investment funds and other investment vehicles in Guernsey, Jersey, Cyprus, Mauritius, the Netherlands and the Cayman Islands.