Salient to Investors:
4,500 private equity firms manage $3 trillion in assets. Preqin said as many as 708 firms face deadlines through 2015 to replenish their funds for future deals to avoid reduced fee income when the investment periods on older funds run out, typically after 5 years. Preqin said many venture capital firms were wiped out from 2000 to 2002 following the tech bubble burst.
Many firms are suffering from below-average profits on their boom-period funding and many expect future returns to be far more modest than in the past. Since investors gravitate to the best-performing managers, 10 percent to 25 percent of firms may find themselves without fresh money. Cambridge Associates say 28 percent of the money raised from 2006 to 2008 has been returned to investors.
Antoine Drean at Triago said the shakeout will be massive, with as many as 25 percent of private-equity managers seeing their funding pulled by 2018, and assets will shrink by as much as 20 percent within 5 years. Triago say a further 14 percent of funding is dry powder that must be invested by the end of 2013 or be lost, a record for dry powder set to expire in a single year.
Since 2007, the industry’s median annual return of 6 percent topped the S&P 500’s 0.2 percent, but is below the 7.5 percent that many pensions need to pay retirees and below the historic average of 13 percent. Underachievers include many megafunds like Blackstone, TPG Capital and KKR.
Jay Fewel at Oregon state pension fund expects some carnage and says there are too many firms. David Fann at TorreyCove Capital Partners says the bottom quartile of any fundraising year will struggle to get backers to commit to new funds. Erik Hirsch at Hamilton Lane Advisors expects 10 percent of firms will be culled over time. David Rubenstein at Carlyle expects private-equity returns to fall from the historic highs of 10 years ago. Kelly DePonte at Probitas Partners said many large investors are doing triage on their portfolios, doubling down on the firms they like, while not re-upping others.
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