Heavyweight UK buyout funds take advantage of “frothy” markets to launch record new funds

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Frothy (Source: Getty)

A number of well-established private equity houses will take to the market within the next 12 months to launch their largest ever funds, sources have told City A.M.

Former Quorn owner Exponent will aim to raise around £1.5bn, according to the sources, while European investor Vitruvian, which has invested in businesses such as JustEat and Skyscanner, hopes to attract €2bn.

Equistone, which invests in select European countries as well as the UK, will formally launch its sixth fund towards the end of the year and is expected to seek a little over its previous total of €2bn.

All three firms declined to comment on their fundraising activity.

The ambitious fundraises — a €2bn fund for Vitrivian would be almost double its predecessor — coincide well with current investor appetite.

“Investors consider private equity to be a highly attractive asset class, particularly due to its ability to generate returns beyond the benchmark index,” said Andy Lund, co-founder of placement agent BearTooth Advisors.

Private equity fundraising hit an eight-year high in 2016, trade body Invest Europe announced last month, at €74.5bn.

Constituting a 37 per cent increase on the previous year, the trend was driven by investors re-injecting capital into funds having received impressive returns from businesses bought on the cheap as the financial crisis unfolded.

Yet this high demand, and the sheer amount of “dry powder” capital which investors are willing to pour in to the asset class, is leading some cynics to raise the spectre of a bubble about to burst.

Data provider Preqin noted in its outlook for the first half of 2017 that more fund managers were coming to market to meet the demand.

This in turn has led some experts in the market to voice concerns that certain players are spending money purely so they can raise more while the going is good, pushing up the prices for assets as they compete to buy companies.

“Of course fund managers recognise it’s an attractive market to fundraise, but I don’t think they are deliberately deploying capital just to get back to market more quickly,” said Lund. “We see many managers who are continuing to show discipline and are concerned about overall pricing and leverage levels.”

Rather than causing a “bubble” of rapidly escalating asset prices, current activity in the private equity sphere is making the market “frothy” at present, according to Lund.

"Managers may have to pay high prices in order to win the bid, but there’s still plenty of evidence that even if a higher price is being paid, the assets will still deliver outperformance," he said.