European megafunds raised record amounts of capital in 2023, according to an update from PitchBook.
Most notably, the top five funds contributed “to a record concentration of over half the year’s fundraising figure in Europe, with CVC Capital Partners raising a global record €26 billion buyout fund,” the PitchBook report revealed.
According to the PitchBook report, a mix of macroeconomic headwinds, new large institutional investors, and a democratization of the asset class benefitted megafunds, which “increased dry powder from €188.4 billion to €276.1 billion in the past two years. Megafund AUM also grew at a faster CAGR than non-mega-funds.”
Megafunds benefit from less competition at “the higher end of the market and thus can go after multibillion-euro megadeals—although these are harder to find and are often more complex. Their large structure allows them to charge investors lower management fees than smaller funds while also leaving room for large and loyal LPs
to further negotiate their fees.”
The research report from PitchBook also mentioned that large LPs such “as pension funds or sovereign wealth funds can fulfil a range of commitment sizes across fund types; however, they often seek out megafunds to satisfy their large commitment needs.”
From a fundraising perspective, European megafunds’ resilience in 2023 “can be attributed to a shift and trim towards experienced managers with proven track records.”
The report from PitchBook noted that over half of the megafund capital “raised in Europe in 2023 came from funds with at least six preceding funds in the same fund family. Investors also refocused on the bread-and-butter of PE: traditional generalist buyout funds. And megafunds indeed tend to have experienced generalist buyout managers with strong reputations.”
The report added that the North American PE megafund market “is 3x larger than the European one, which still has opportunities to grow.”
As the North American PE market matures, both GPs and LPs have “turned towards Europe for further growth. 20% of the capital raised by European megafunds came from North American-headquartered firms in 2023.”
From the LP perspective, it has been reported that 75.2% of the LP commitment” count into European megafunds came from North America in 2023, up from 55.1% in 2021.”
However, even in North America, PitchBook has “not seen megafunds larger than €30 billion.”
This leads Pitcbhook to believe that we may be “reaching a ceiling in megafund size in the near term, especially as the change in the interest rate environment will make it tougher to continue outperforming other asset classes given the importance of leverage for buyout funds.”
Their belief is that CVC Capital Partners’ buyout fund size record will “likely not be broken in the near future.”
In the past few years, European megafunds have “increased, culminating in a record year for megafunds in 2023 as the asset class continues to attract more capital than ever before, even in a challenging macroeconomic environment.”
A mix of new large institutional clients and “a democratization of the asset class has helped fuel the rise of the megafund, which often ticks the required boxes for LPs of experienced manager, proven track record, generalist, buyout fund, reputable firm, and lower management fee.”
The PitchBook report concluded that megafunds will “likely continue dominating fundraising in Europe in the short term, but as monetary policy starts easing, the concentration in megafunds will likely drop off. Until then, CVC Capital Partners’ record buyout fund will remain the largest.”
