Fund sizes have been rising for years and current signs point to this trend continuing. Just recently, the average private equity fund surpassed $1 billion for the first time (and so far in 2019 the average buyout fund has raised nearly $1.7 billion). One major contributor to this increase in fund sizes is the overall uptick in mega-funds activity in recent years. In private equity, mega-funds are defined as vehicles with $5 billion or more (not to be confused with venture capital, where $1 billion is enough to be considered a mega-fund).

Read our FAQ to learn more about mega-funds and their role in private equity.

What are mega-funds?

In private equity, mega-funds are vehicles with pooled capital of $5 billion or more. These large funds can deploy billion-dollar plus equity checks and make up a significant and growing portion of overall capital raised in private equity.

How big of a role do mega-funds play in private equity?

Mega-funds have cemented their status as the most influential group of funds in the industry due to the especially large sum of capital they control. Despite being relatively limited in number, just a handful of funds accounted for 45.3% of capital raised in North America between 2016 and 2018 and 42.2% in Europe over the same timeframe.

What types of GPs typically manage mega-funds?

GPs managing mega-funds are often larger “household name” firms. These larger, diversified firms with deep relationships and expertise in a range of areas are often the go-to source for LPs. Still, smaller, more specialized firms are also increasingly raising mega-funds, including those with tech-focused or niche strategies (including GP stakes).

What advantages do mega-funds provide to GPs?

Mega-funds offer GPs a (relatively) less competitive avenue in which to do business as middle-market strategies become more crowded. For larger firms, the sheer amount of capital involved acts as an advantage, creating a buffer that is difficult for smaller firms to overcome.

What advantages do mega-funds provide to LPs?

From an LP’s perspective, one of the most attractive benefits of investing in mega-funds is a reduced number of GP relationships. Many larger, diversified GPs that manage mega-funds have deep expertise in a wide range of private market strategies—acting as a one-stop shop for LPs. Having fewer GP relationships helps minimize due diligence costs and effort for an LP. Further, the less competitive mega-fund environment makes forecasting easier and more predictable for large pensions and endowments.

What disadvantages might mega-funds pose?

Mega-funds are less flexible and may provide less of an opportunity to significantly outperform smaller funds and public markets. PitchBook research on the topic shows that fewer mega-funds showed significant levels of outperformance or underperformance when compared to traditional counterparts.

Additionally, smaller deals (that often transact at lower multiples and have higher potential for appreciation) have a relatively smaller impact on such a large fund, encouraging managers to seek larger deals at higher multiples.

For GPs, the massive amount of capital in a mega-fund means that fulfilling their expected commitment becomes difficult for more junior partners. For example, for a $20 billion fund, an otherwise reasonable 3% commitment becomes a whopping $600 million.

Is there a limit to how large mega-funds can be?

There is not necessarily a limit to how large these funds can be, but so far, they have not exceeded $25 billion. The $20-25 billion range appears to be a soft cap for PE mega-funds. Historically, even firms with extensive resources such as Blackstone—which has raised the most mega-fund capital—have not raised funds above this mark, though the firm is reportedly seeking to close on a $25 billion flagship buyout fund in 3Q 2019.  

How much funding have mega-funds gotten recently?

Despite mega-funds hitting an all-time one-year fundraising high in 2007 (with $177.3 billion raised), altogether, the last three years have seen the highest ever capital raised for mega-funds. Through 2016-2018, mega-funds accounted for an impressive $398.9 billion (surpassing the $351.0 billion raised from 2006-2008). Notably, 2017 alone accounted for $160.5 billion, a recent one-year high.

What does the near future look like for raising mega-funds?

As of 1Q 2019, there are at least 19 open or upcoming mega-funds seeking a cumulative total above $185 billion. With this increased activity, 2019 could be propelled to record-setting figures for mega-funds.

Want to learn more about mega-funds? Read our analyst note.

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