In 2008, private equity real estate funds raised $29.7 billion, a 51 percent rise from $14.5 billion raised in 2007, according to 2009 US private equity watch: an industry in flux, a study by professional services firm Ernst & Young.
In the first quarter of 2009, real estate funds raised $12.8 billion, almost matching the capital raised in 2007, according to the study.
Global private equity firms raised $448.7 billion in 2008, a 0.8 percent decrease from 2007. The study included buyout, real estate, infrastructure, mezzanine, distressed and turnaround private equity fund types.
However, most of the capital was actually raised and committed in previous years, the study added. In both years, funds headquartered in the US raised roughly 70 percent of the total.
Worldwide, 409 funds closed last year, a 22 percent rise compared to 499 funds in 2007. However, the average size of funds closed increased 22 percent from $907 million in 2007 to $1.1 billion in 2008.
In the first quarter of 2009, 41 private equity funds raised $39.2 billion. This was the poorest quarterly performance since the fourth quarter of 2004, the study said. Of the $39.2 billion, US-focused funds raised $16.5 billion, Europe-focused funds raised $21.3 billion and $1.4 billion were raised by funds focused on the rest of the world.
Among the top 10 private equity funds closed in 2008, Blackstone Real Estate Partners VI, which closed on $10.9 billion, was placed seventh. Morgan Stanley Real Estate Fund VI International, which closed on $8 billion was also seventh out of top 10 private equity funds closed in 2007.
Globally, the disclosed deal value of private equity deals in 2008 dipped to $235.3 billion, a 71 percent decrease from $804.6 billion in 2007, according to the study.
In the US, private equity deal activity fell 42 percent from 1,527 deals in 2007 to 1,072 deals in 2008. Deal value also fell 450 percent in the corresponding period from $425.7 billion to $77.4 billion. In 2009’s first quarter, 185 US private equity deals netted $5.5 billion, the lowest reported quarter deal value in 10 years, the study said.
Mid-market deals have gained ground while the popularity of mega deals have sunk in the US due to the scarcity of credit, comparatively high purchase price multiples and higher equity requirements, the study noted.
There were no deals of $5 billion or more in 2008, whereas more of such deals had been seen between 2005 and 2007.
According to the study, the average deal size disclosed in the US for the first quarter of 2009 was $58.2 million. The figure is a nearly threefold drop compared to the first quarter of 2008 when the average deal size was $142 million and nearly 15 times lower than the same period in 2007, when the average deal size was $850 million.
The study also noted the credit crisis saw US private equity firms turning to equity-only type investments such as minority positions and PIPEs.
In 2008, firms disclosed 273 minority investments in US-based companies, up roughly 22 percent from 212 in 2007. In the first quarter of 2009, private equity firms made 64 minority investments in US companies. Although this figure was lower than the corresponding period in 2008, the quarterly volume was equal to or higher than 2007 levels.
Private equity deal value in US PIPE deals rose more than five times in 2008 compared to 2007, from $3.4 billion to $19.1 billion. The asset class also took up a larger share of the US PIPE market at 11 percent in 2008, compared to 4 percent in 2007.
Loan-to-own deals are also getting more popular as well. Loan-to-own deals are when investors purchase bonds of distressed companies at a discount and convert the debt to equity during the restructuring process.
While the credit crisis is beginning to ease, a key issue for the asset class is whether banks will have adequate capital to finance new deals, or recapitalize portfolio companies acquired at the peak of the M&A bubble, the study said.
Over the next few years, the industry will see significant consolidation. Firms, which survive will surface even stronger while capital invested over this period is expected to yield very high returns, according to the study.