Private equity fundraising in the US surged over the past decade, with annual figures climbing from less than $60 billion in 2010 to a record $301 billion in 2019.

But now that the coronavirus outbreak has reduced travel, dealmaking has slowed, and limited partners have begun to worry about the economy, the fundraising market could be in line for its first serious decline since the last financial crisis.

"Though we remain hopeful that fundraising will not suffer as much as it did after the last crisis, the prudent assumption is the macro-environment for fundraising will suffer significantly and fundraising levels could remain depressed for an extended period," Eaton Partners partner Jeff Eaton said in an email.

Considering the relatively slow pace of the fundraising process, it's unlikely the recent upheaval will have much of an impact on Q1 numbers. Eventually, though, effects will be felt.

"We expect this to be a difficult time for most firms fundraising, though the impact may not be seen in the data until the second and third quarters," PitchBook analyst Wylie Fernyhough wrote in an analyst note on the effects of COVID-19 on the PE market. "LPs that had already completed much of their due diligence checklist and mapped out new commitments are likely to follow through."

Even before the coronavirus outbreak, the cyclical nature of buyout fundraising meant this year's totals were expected to fall below last year's, according to the 2020 PitchBook Private Equity Outlook. Many major private equity firms raised massive sums in 2019, including names such as Blackstone, Vista Equity Partners and Leonard Green & Partners, likely taking them off the market for a year or two. Blackstone topped everyone by pulling in $26 billion, the largest private equity fund ever.

No firms were expected to top or even approach that figure in 2020, even before most of the country locked down. Platinum Equity announced in January the closing of this year's largest fund to date, a $10 billion effort that topped a $6.5 billion predecessor. But otherwise, there haven't been any additional 11-figure vehicles so far in the US.

Platinum Equity partner Mark Barnhill said the timing was perfect for the firm, which had already finished investing its previous flagship effort. "Sometimes it's better to be lucky than good," he said.

While large investors such as Platinum could come through a slowdown unscathed, smaller middle-market firms might not be so lucky. The new market reality will make gathering capital tough for less-established investors without deep pockets and long track records of success.

"Fresh fundraising for middle-market GPs will prove difficult as most LPs are pushing these decisions out several months," Fernyhough wrote. "For first-time funds and nascent managers without an established LP base expecting to begin the fundraising process in today's environment, we expect it will prove to be a nearly impossible task."

On the other side of the relationship, institutional investors such as pension funds or endowments have their own set of problems. For one, they've likely been most concerned about the likely dip in valuation of portfolio companies and the next time they will be asked to draw down capital. Some might even be recalculating their entire investment strategy, Barnhill said.

"LPs are rethinking where's the best place to put my money right now," he said. "I think you're going to see a lot more push into distressed assets because there's a sense there's a lot more opportunity there."

To make matters more difficult for private equity firms, they'll have to convince limited partners that they would perform well in a distressed environment. And that's no easy task, unless a firm has a history of getting companies through difficult times. For Barnhill and Platinum, that's not as big of a problem.

"I could find a story about our operational capabilities and our track record that would make it more likely that we'd be able to convince investors to re-up," Barnhill said. "But I'm happy I don't have to go out and tell that story right now. Because you still have to deal with that slowdown in the market and everybody's reluctant."

"If they are still in leveraged buyouts, they are going to be looking at managers with an established track record and, No. 2, be able to work in crisis environment, in a downturn environment," he added.

There is a huge silver lining for private equity. If stock prices continue to plunge or remain depressed, firms will have the chance to shop for bargains after years of skyrocketing multiples. And with the Federal Reserve dropping interest rates to near zero earlier this month, they could potentially borrow money at historically cheap rates—or simply tap into the record levels of dry powder (roughly $1.5 trillion total) already on hand. In other words, the chance for substantial returns should retain at least some LP interest.

But even that could come with its own risks, since it is still unclear how long it will be before the market could rally or whether private equity firms can secure financing in a volatile environment. In some cases, general partners may have to devote more equity to a deal than in a typical leveraged buyout. But firms that recently closed funds, including Platinum, can still afford it.

Barnhill said, "I have a $10 billion war chest now that puts us in a very unique position relative to these opportunities."

Featured image via Anton Petrus/Moment Collection/Getty Images

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