Market Growth

Private equity markets have been growing steadily since the early 1980’s. Today, private equity fundraising and investment activity is at record levels, driven by dramatic growth in the buyout sector. Investment in private equity worldwide has grown from approximately US$70 billion invested in 1998 to US$110 billion in 2004. Canadian private equity investments have grown from approximately $6.6 billion invested in 2001 to $9.2 billion in 2005.

Canada

The Canadian market is less advanced than other major markets, with most investors and fund managers entering the asset class during the past 10 to 15 years. As strong private equity fund managers have continued to demonstrate their ability to outperform other types of investments, investors have committed ever larger amounts to their funds. Fundraising in the Canadian private equity market recently reached an all time high, as Canadian buyout funds raised $6.4 billion in new investor commitments through the end of the third quarter of 2006, compared to $1.44 billion in the full year 2005. When combined with the other major private equity sub sectors of venture capital and mezzanine funds, total fundraising by Canadian private equity funds amounted to $7.9 billion through the end of the third quarter of 2006 compared to $3.9 billion in the full year 2005.

While the Canadian market has shown very strong growth in the past several years, it remains well behind the relative pace of U.S. market activity. Kensington believes that Canadian private equity markets remain well positioned for continued strong growth in the years ahead.

United States

For several decades, the U.S. private equity industry has been evolving to its present mature status as an asset class that is widely accepted among institutional investors around the world. Over this time period, like other asset classes, the private equity industry has been through several market cycles and has seen periods of extreme exuberance as well as periods of caution and concern.

U.S. private equity markets are also reaching new record levels. During the first three quarters of 2006, U.S. private equity firms raised US$172.2 billion in new investor commitments, surpassing the US$162.5 billion they raised during the full year 2005. The buyout sector has been the primary driver of growth, representing approximately two-thirds of the total capital raised at US$118 billion. By early November 2006, U.S. private equity fundraising had surpassed the US$177.75 billion record set in 2000, when venture capital firms led the private markets. Many industry participants expect full year 2006 fundraising totals to finish in the US$200 billion to US$225 billion range.

One of the factors driving the recent growth of the U.S. buyout sector has been the rising number of very large private equity funds of $10 billion or more, commonly referred to as “mega funds”. Of the 253 funds that have raised money through the end of the third quarter of 2006, the six largest are responsible for US$52.3 billion, or 30%, of the total dollars raised. These firms are seeking more money as they pursue acquisitions of ever larger companies. Of the 10 largest buyouts ever conducted by private equity firms, seven were completed within the 18 months ended September 30, 2006, with plans for many other very large deals announced and still pending. These mega fund managers believe that their growing capital resources provide them with the ability to bid on very large global corporations in transactions that were previously considered too large for private equity buyouts, creating a new, virtually untapped market sector.

Europe

The private equity markets in Europe have also experienced significant growth. Fundraising by European private equity funds reached €71.8 billion in 2005, a record for the industry and more than two and a half times the 2004 level of €27.4 billion. As in other major markets, buyout firms are driving much of this growth capturing approximately 80% of total funds raised (€57.7 billion) in 2005, up from 65% (€17.8 billion) in 2004.

Investments made by European private equity firms show a similar growth pattern through the past several years.

Within the European market, U.K. firms are the most active and manage the greatest amount of capital. In 2005, U.K. fund managers raised €45.6 billion or 63.5% of the €71.8 billion total. Private equity firms based in France accounted for the next largest percentage at 16.0% (€11.5 billion raised), with Germany third at 4.0% (€2.9 billion raised). In Europe, private equity is becoming an accepted means of financing succession and for the divestiture of non-core assets. Today there are reportedly over 90,000 private companies with revenues of between €25 100 million. Factors that are driving the European buyout market include: deregulation and privatisation, which frees up the ownership of state and bank owned companies; Euro-market integration, in which ongoing efforts to broaden the focus of companies to the entire European market is forcing locally focused vertically integrated companies to divest some assets and acquire others as they redefine their businesses; and focus on shareholder value which has caused many European companies to invest heavily in productivity enhancement and divest less profitable and non-core business activities.

Next: Private Equity Historically Outperforms Public Markets →

↑ Main: Investing in Private Equity

Version Française