Private Equity Staying Rational with Fund Sizes

July 29, 2021 | Derek Schmidt, CFA, CAIA, Director of Private Equity

Column/line chart showing PE fund size step-ups and increased fund sizes. Chart subtitle: Private equity fund size step-ups have remained consistent over the last decade. Chart description: Left y-axis ranges percent from 0-100%. X-axis goes by years from 2007 to 1H2021. Columns in purple show % PE Funds Raising Greater Fund Size; line in gray shows Median % Fund Size Step-Up. Ranges for both categories are fairly consistent; columns hover near 70% and line has larger range but has hovered between 30% and 51% for the past ten years. The lowest year for both categories was 2010, with 65% and 22% respectively. As of 1H2021, 72% of PE funds are raising greater fund sizes and the median fund size step-up is 48%. Chart source: Pitchbook 2Q 2021 U.S. PE Breakdown.

Despite strong fundraising numbers in recent years, private equity managers in the U.S. have stayed consistent with subsequent fund size step-ups. Through the first half of 2021, 72% of private equity managers launched funds with increased size targets, in line with the average over the last decade. The median fund size step-up in the first half of the year was 48%, modestly above the 40% average increase over the last decade, but in line with the industry average over the last five years.

Fund size is a critical factor for private equity investors to consider, as it can push a manager outside their strategy, require additional resources, require purchasing larger businesses that are more efficient, and/or take managers longer to deploy. That said, modest fund size growth is healthy for a private equity organization, allowing for internal growth, giving existing investors the ability to scale their allocations, and creating opportunities to bring new investors into the fund. Risks related to increased fund size can be mitigated by managers via scaled resources, targeting more portfolio companies, reducing the amount of co-investment offered, and/or reducing leverage — all things we look for in our due diligence process. We believe modest growth is healthy and to be encouraged if done responsibly, but we do carefully evaluate the magnitude of a fund size increase relative to our assessment of a manager’s capacity and strategy.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Derek Schmidt, CFA, CAIA
Director of Private Equity

Get to Know Derek

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