Derek Schmidt, CFA, CAIA
Director of Private Equity
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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