Determinants of buyout fundraising: Credit market conditions as a driver of capital commitments into buyout funds

Abstract

The purpose of this thesis is to address the lack of understanding of drivers behind capital commitments into buyout (BO) funds. According to my knowledge, this is one of the first studies to solely focus on the drivers of buyout fundraising and moreover the first to show that capital commitments into buyout funds are driven by credit market conditions; when credit market conditions are loose more funds are raised and more money is committed to a particular fund.

I obtain a comprehensive sample of European and North American buyout funds from two different sources. Through Thomson VentureXpert (VE), I access the information of 5,420 buyout funds raised during 1980-2011 and from Preqin, I obtain the data of 1,273 buyout funds. VE is widely used among academics and thus a reliable source for an aggregate country and a firm level analysis. Preqin is a fairly new database and employed only by the most recent studies, thus giving access to a fairly new source of data for a fund-level analysis.

My results indicate that a 100 basis points decrease in the credit spread leads to a US$47billion aggregate increase in commitments to buyout funds in the following year. The significant increase in the aggregate buyout fundraising volume is due to an increase in the fund size by follow-on funds and higher number of first-time funds being raised. A 100bps decrease in the credit spread increases the number of first-time buyout funds by 121 in the following year and the size of a follow-on fund raised by an established private equity (PE) firm increases by 17%, when the credit spread decreases by 100bps.

Also, the probability of a PE firm raising a follow-on fund is affected by the prevailing credit market conditions. A decrease of 100bps in the credit spread increases the probability of raising a fund by 5% across the industry; however, when controlling for the performance of a previous fund for an established GP, the probability diminishes to 1.3%.

Finally, I end my study by comparing the performance characteristics of buyout funds to the existing literature on venture capital funds. I conclude that even though macro-economic drivers behind capital commitments into buyout funds differ from venture capital funds, the micro-level drivers of fund performance are the same. Across the industry larger funds earn lower returns, however a particular GP earns larger returns with larger funds; but the effect diminishes away at a very large fund size.