What the Largest PE Funds from 2019 Tell Us About 2020

The largest private equity funds that closed in 2019 illustrate multiple trends that are expected to continue throughout 2020, including North America’s continued fundraising dominance and the industry’s increasing focus on technology.

A total of six law firms advised on the 15 largest private equity funds that closed last year, according to data provided by research firm Preqin, although legal counsel information for two of the funds was not immediately available.

Simpson Thacher & Bartlett LLP advised on the highest number of any firm, serving as counsel for four of the top 15. Meanwhile, Kirkland & Ellis LLP advised on three, Goodwin Procter and Fried Frank Harris Shriver & Jacobson LLP each advised on two, and Gibson Dunn & Crutcher LLP and Clearly Gottlieb Steen & Hamilton advised on one apiece.

Of the 15 largest funds, 11 have a primary focus on investments in North America, three have a European focus, and one has a mandate to mainly invest in Asia.

Despite the private equity industry’s overall global growth in recent years, the fact that a major chunk of the largest funds from last year are focused on North America isn’t shocking, because a very significant portion of the investment opportunities that are suitable for PE funds exist within the U.S., according to Shukie Grossman, a partner at Gibson Dunn & Crutcher LLP and co-chair of the firm’s Investment Funds practice group.

“It’s not surprising that a preponderance of the capital raised is by U.S.-focused funds,” Grossman said.

Still, the top fund on the list, which was raised by China’s Sino IC Capital, will focus on information technology investments in Asia. Might that signify that Asia-focused funds will be featured more on future lists? Not necessarily, according to Grossman.

“I think that fund is an outlier,” he said. “It’s my understanding that the capital was infused predominantly by state organizations to facilitate growth in the Chinese chip industry. I don’t think it’s an apples-to-apples comparison between that fund and the others that are listed by Preqin.”

Peter Gilman, a corporate partner at Simpson Thacher, told Law360 that, while the market for private equity activity in Asia is growing, the PE industry in the region is still “very young” and remains in the development stage. Thus, he sees it as unlikely that the inclusion of China Integrated Circuit Industry Investment Fund II in the top spot on this year’s list means next year’s list will feature more Asia-focused funds.

“While some are seeking to place large bets in Asia, others are focusing more heavily on the established, dominant markets in North America and Europe,” Gilman said. “If there was a greater degree of consensus around Asia, I think you would see more than one Asia-focused fund on the list.”

According to Andrew Wright, a partner in the Investment Funds group of Kirkland & Ellis, attorneys should be aware that while Asia-focused funds might not have a commanding presence on the list of the largest funds, that doesn't mean clients aren’t looking at the region.

“We’re seeing increased interest in raising funds at scale in select emerging markets, including Southeast Asia and India, although the size of each of these funds tends to be somewhat less than those of the jumbo funds,” he said.

The list of the largest funds from 2019 tells us more than just where in the world private equity is most popular, however. Five of the 15 largest funds from last year have a focus on information technology investments, including three of the top five. This is a trend that is in no way slowing, according to Wright.

“Technology remains a white hot part of the private equity investment universe,” he said.

That’s because businesses across the globe, and not just those focused on tech, are in the midst of attempting to digitally transform in order to keep up with the fact that data is becoming ever more central to business models. Being technologically savvy is a requirement in today’s world, and the private equity industry has noticed. Going forward, it’s very possible that even more of the largest funds in a given year will have a tech-centered focus.

“The way that deals are sourced and value is delivered to investors is changing rapidly with technological innovation; everything has become data driven,” Gilman said. “PE firms are rightfully focusing on investments in information technology and related sectors, as there is both a capital need and the potential to utilize information in new and innovative ways to deliver superior returns.”

Technology will continue to be an area where private equity firms seek to become better informed as part of their efforts to stand out when competing for investor dollars, but it’s only one of the spaces in which PE firms are honing their focus. The 10th-largest fund from last year is focused on secondaries investments, which is an area very much en vogue.

Although it's the only secondaries fund to show up on the list of the 15 largest funds from last year, there were multiple secondaries funds that reached into billions of dollars last year — in fact, two of the 10 largest funds that closed during last year’s third quarter were secondaries vehicles.

Secondaries deals involve the purchase or sale of investors’ existing interests in an investment vehicle, and according to Grossman, there’s a correlation in the increased size of primary investment funds and the increased size of secondaries investment funds.

“As primary investment funds grow, the opportunity for secondaries acquisitions necessarily grows, thus requiring larger secondaries funds,” he said.

Not only is the secondaries market growing, it’s evolving, according to Wright. Today, there’s more focus, and capital, being directed into sophisticated and complex investment strategies and structures, such as participation in general partner-led secondaries, including preferred equity structures, tender offers, stapled secondaries and more, according to Wright.

“To paraphrase the old TV commercial, this is not your father’s secondaries market anymore,” Wright said.

Some lawyers reading this story might be wondering why a particular fund they worked on isn’t included in the list. Preqin has different genres of what they term private equity funds. So, for example, Blackstone’s debut infrastructure investment vehicle — which was raised with assistance from Simpson Thacher and closed in July with $14 billion in tow, according to a statement from the time — is considered by Preqin to be adjacent to private equity but not straight up PE, and therefore it didn’t make the list.

Infrastructure and real estate are examples of subsectors where there may have been funds that were large enough to make this list, but because Preqin considers them to be separate from standard private equity funds, they were not included, Grossman said.

“The one that I would highlight in addition to that is venture capital,” Grossman said. “Venture capital has morphed in some ways, and there are now mega funds that, at their current sizes, would seem to fit better under the overall umbrella of private equity.”

As we continue to get deeper into 2020, there will be more talk about a potential U.S. recession on the horizon and how that might affect private equity fundraising. According to Gilman, absent a serious shock to the system, even an economic downturn shouldn’t have too much of an effect on private equity fundraising.

“I think the PE industry is positioned about as well as it can be for future success across market cycles,” Gilman said.

Additionally, there will be a U.S. presidential election in November, and depending on who comes out victorious, there could be someone in charge with a very different view of the PE industry. Still, Gilman anticipates the private equity industry will continue to raise funds with gusto, regardless of who is sitting in the Oval Office in 2021.

“We live in a very polarized political environment today, and that trend will continue as we near the upcoming presidential election,” he said. “I think the private equity industry has adapted well to the challenges that operating in such an environment present, and that PE fundamentals are such that the industry will continue to enjoy success irrespective of political partisanship and electoral uncertainty.”