Fund raising by global private equity (PE) firms in the July-September quarter hit a two-year low on a quarterly basis in the wake of the recent crisis in the US subprime mortgage market. While a delay in their fund-raising plans may result in a temporary drop in the number of private equity deals globally, it could come as a blessing in disguise for Indian and Chinese companies planning to raise capital.
Around 136 private equity funds have raised $91 billion globally during the quarter under review against $177 billion in the April-June quarter, according to Private Equity Intelligence, a global private equity research entity. “This suggests that in the short term the credit crunch (due to the subprime crisis) has had an adverse effect on fund raising,” the Private Equity Intelligence report said. But shortage of money supply is the only concern for private equity firms, especially the smaller ones, in meeting their fund raising targets.
“With so many managers on the road trying to gather commitments for their funds, it is likely that managers will find it increasingly challenging to reach their original fund-raising targets. Apart from the biggest firms, and those that are able to draw entirely from existing limited partners, it is going to become an increasingly difficult time for fund managers currently on the road,” it said. Currently, there are 1,195 funds seeking a staggering $619 billion in aggregate target commitments, estimates Private Equity Intelligence.
As private equity firms receive a major share of money from the US, domestic industry officials and analysts agree that fund-raising plans of several private equity firms could be affected in the near-term. The financial crunch, a result of a fall in risk appetite, is an outcome of the recent crash in the US subprime market, which threatens to substantially slowdown its economy. Venture Intelligence CEO Arun Natarajan feels this situation may not impact the fund-raising activity of all private equity firms. Venture Intelligence is a private equity research firm
“Fund raising by private equity firms with major source of money from financial institutions and banks could be affected while those (several venture funds) raising from insurance, pension funds and university endowments will be least affected,” he said.
Among others, Beringea, an international private equity firm, recently lowered the target for its Global Rights Fund III to $150 million from $250 million, according to Private Equity Intelligence.
Meanwhile, several private equity players are extending their closing dates for their funds by a few more months to bring in more investors and waiting for the dust in the US subprime market to settle. Amid the relatively bleak scenario for private equity firms on fund raising, there is a huge rush for Indian and Chinese companies by private equity players due to their potential to fetch higher risk-adjusted returns vis-a-vis companies in other economies.
“Despite the slowdown in fund raising, there is a rush for Indian and Chinese companies at the moment from private equity firms globally. Even if the crunch situation continues (for private equity), there will be no shortage of private equity money for these companies,” said a top official at a Bangalore-based venture capital firm.
Source: Economic Times