Private Equity Fund Raising – Form D Filings Study
Private equity activity has increased dramatically since the launch of our Research Database in 2005, especially in the middle market – more firms, substantially more capital.
Besides our own internal database, year-to-year changes in Form D filings provide another indicator for private equity capital raising activity.
Using data from 88,000 Form D filings over the past three years, I compared the capital raising trends for private equity funds, hedge funds and venture capital funds.
Here’s what I found…
Private Equity Trends in Form D Filings
For private equity funds, Form D filings show the same growth trend that we see in our database – a steady increase in the number of filings for private equity capital raises over recent years.
The chart below shows the number of Form D filings for Hedge Funds, Private Equity funds and Venture Capital funds for 2014, 2015 & 2016 (I included hedge fund and VC data for comparison & scale purposes).
The next chart compares the total amount offered for each of these fund types for the same years.
- While the quantity of hedge fund Form D filings is declining, private equity is on the rise.
- While hedge funds have more Form D filings overall, in total dollar value, private equity funds dwarf the other two categories.
- Was 2015 a peak or an anomaly? The answer is, I’m not quite sure. I looked at the data to see if I could explain the spike in total capital raised in 2015. It’s not from one single event, but mostly because there were just more, larger, $1 billion + funds raised in 2015. Some stats…
Year Funds with $1+ billion Total for these Funds ($billions)
2014 43 91
2015 69 180
2016 48 108
For funds with a successful track record, we have heard anecdotally that Limited Partners prefer the General Partners to continue to invest in the same size of entities rather than move up in value. That is, larger funds typically require GPs to make larger investments to deploy the capital. Because the requisite skills to manage a large company are not necessarily the same as the skills required to manage mid-size companies, the LPs are saying, “Stick to what worked previously, where you had previous success rather than moving up in fund size and forcing yourself to acquire larger companies.”.
I wonder if this sentiment plays into the data we are seeing for 2016 or is it simply a case of more, smaller entrants into the market?
What is Form D?
Form D is filed with the SEC when a company (or fund) is raising capital but is exempt from registering their offer of securities under Regulation D of the U.S. Securities and Exchange Commission. Form D effectively says, “We are raising capital, but we are exempt from registering this capital raise as an official securities offering with the SEC.”.
Why? Because companies and funds want the ability to raise smaller amounts of capital or to raise capital mostly from accredited investors without the hassle and paperwork of registering the offering with the SEC. In short, simplicity and expediency.
What does it mean to be exempt from registration?
If a company or investment fund raises capital, it must register this activity with the SEC according to the Securities Act of 1933. However, certain capital raises may be exempt from this registration if they meet select criteria. Without going into too much detail, generally the criteria are related to the size of the offering and how (and to whom) it is marketed. There are three exemption categories:
- Rule 504 – up to $1 million offered
- Rule 505 – up to $5 million, to unlimited accredited investors, plus up to 35 non-accredited investors
- Rule 506 – unlimited amount, to unlimited accredited investors, plus up to 35 non-accredited, sophisticated investors.
If a capital raise can fall under rules 504, 505 or 506, the company simply files the shorter Form D with the SEC to say that they are exempt from the full securities registration process.
In future posts, I will:
- Show the distribution of fund sizes for private equity Form D filings.
- Show Form D filings for other industries sectors (technology, healthcare, etc.) to see how they compare relative to each other. This data is quite interesting for industry trend analysis.