What are mega-funds in private equity?

Over the past couple of years, private equity funds, deal sizes and exits have seen significant increases. In 2021, the average PE fund size in the US approached $1 billion, and one of the largest contributors to this upward trend has been an increase in PE mega-funds—vehicles valued at $5 billion or more. Last year, PE mega-funds raised $143.4 billion, and PE mega-deals reached their greatest aggregate value since 2007, accounting for 32% of all US private equity deal activity.

Here we dive into mega-funds, addressing some of the most common questions surrounding this fund vehicle and examining how they may be affected by current market conditions.

What are mega-funds?

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. In total, mega-funds comprised roughly 44% of all private equity capital raised from 2019–2021.

The proliferation of mega-funds in the private equity landscape has been driven by several factors. For one, the COVID-19 pandemic played a significant role. In the wake of the pandemic’s economic downturn, many LPs re-upped relationships with existing managers, foregoing the diligence and perceived risk of exploring new relationships and ensuring an easy fundraising environment for mature PE firms. The fast economic recovery and heightened deal activity in the second half of 2020 created a fertile ground for those mature firms to then successfully deploy their capital in a competitive deal environment. The low interest rates and excess dry powder that defined the early phases of the pandemic also played a role in the recent growth of mega-funds.

Additionally, an overall shift in LP sentiment has also contributed to the rise in private equity mega-funds. Increasingly, LPs are raising their private market allocations, giving preference to managers that take larger commitments and employ multiple strategies.

How much funding have mega-funds gotten recently?

From 2019 to 2021, private equity mega-funds raised $407.4 billion. With record-setting deal activity and the quick deployment of capital, firms have experienced smooth fundraising cycles and GPs have been able to return distributions to their LPs faster, with many LPs then recycling these distributions into new funds.

What types of GPs typically manage mega-funds?

GPs managing mega-funds are often large private equity firms, like Blackstone Group, Goldman Sachs and Kohlberg Kravis Roberts. 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).

In fact, the current environment of easy fundraising for GPs, has allowed emerging PE mega-fund managers to break into the space. This year, smaller private equity firms like Summit Partners and Veritas have seen quick growth, easily surpassing the $5 billion mega-fund mark for their flagship funds.

What advantages do mega-funds provide to GPs?

Private equity 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. In recent years, the lifecycle of a mega-fund has also proven advantageous for LPs, as the quick turnaround of these vehicles has allowed them to deploy capital quickly and return to market.

What advantages do mega-funds provide to LPs?

From an LP’s perspective, one of the most attractive benefits of investing in private equity 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. However, the capital availability and lifted valuation multiples over the past couple of years have led to the outperformance of mega-funds compared to other private equity vehicles in recent years, and it’s likely that this trend will continuei n the short-term.

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?

In the past, PE mega-funds have hovered below the $25 billion mark. However, some firms have started to set their sights on fund sizes above this threshold.

Over the past couple of months, Blackstone raised $24.1 billion for a private equity real estate fund. The firm plans to put $300 million of its own money along with an additional $5.9 billion from investors into the fund, placing it at over $30 billion and making it the largest private-equity mega-fund to date. And they’re not the only firm pushing the boundaries of traditional fundraising caps—The Carlyle Group has plans to raise $27 billion for its 13th flagship fund. Additionally, some private market players foresee the emergence of super-mega-funds—or vehicles valued at $50 billion— in the near future.

These historically high private equity mega-fund targets are significant in that LPs have traditionally held the sentiment that mega-funds should not surpass the $20-25 billion range. However, despite this traditional perspective, the demand for these vehicles remains.

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

The current macroeconomic conditions marked by high inflation and interest rates along with market recalibrations on valuations may present some challenges in the private equity mega-fund environment heading into the second half of 2022.

Increased interest rates could affect the mega-fund PE landscape in several ways. For one, PE firms typically rely on access to cheap capital to finance LBOs—which compose a big chunk of the mega-fund ecosystem—and increased borrowing costs could cause firms to invest at a more traditional, stable pace than the quick deployment seen in the past years that has been a major contributor to the growth in mega-funds. Additionally, heightened interest rates pose a challenge to exit multiples, as they increase the discount route and decrease valuations for large buyout models.

However, there are some market conditions that favor mega-funds over other middle market alternatives. Currently, the demand of capital by GPs is greater than the amount LPs have to allocate, which favors large private equity firms who are better positioned to receive LP allocations.

Want to learn more about mega-funds and private equity trends?

Learn more about the increase in mega-deal and mega-exit activity
Read our analyst note: The growing prominence of US PE mega-deals and exits

Gain insights into trends defining the entire PE landscape
Explore our Q2 US PE Breakdown Report

Explore the largest private mega-funds of 2021
Read our news article: Private equity’s mega-funds are making big moves in 2021