Private equity bosses lose sleep over buyout boom going bust
NEW YORK: Private equity, an investing trade plied by 4,500 firms with $3 trillion in assets, is bracing for a shakeout that's been brewing since the collapse of credit markets choked off a record leveraged-buyout binge. Firms that attracted an unprecedented $702 billion from investors from 2006 to 2008 must replenish their coffers for future deals and avoid a reduction in fee income when the investment periods on those older funds run out, typically after five years.
As many as 708 firms face such deadlines through 2015, according to researcher Preqin. Private-equity firms pool money from investors including pensionplans and endowments with a mandate to buy companies within five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 per cent to 2 per cent of committed funds and keep 20 per cent of profit from investments.
While fundraising is a routine part of the buyout business, today's environment is anything but. Many firms are suffering from below-average profits on their boom period funds and top executives from Carlyle Group co-founder David Rubenstein to Blackstone Group president Tony James say future returns will be far more modest than those investors got used to in the past. As investors gravitate to the best-performing managers and cut loose others, 10 per cent to 25 per cent of firms may find themselves without fresh money.
'RATHER MASSIVE'
"The shakeout will be rather massive," said Antoine Drean, chief executive officer of Triago, a Paris-based firm that helps private-equity firms raise money. Drean estimates that as many as a quarter of private equitymanagers will see their funding pulled by 2018. The firms are under growing pressure to invest the capital they already have.
About 28 per cent of the money raised from 2006 to 2008 has been paid back to investors, according toCambridge Associates, a Boston-based research and consulting firm. More than $100 billion, or 14 per cent, of the $702-billion raised, is yet-to-be invested dry powder that firms must use or lose by the end of 2013, according to Triago.
That's a record for dry powder set to expire in a single year, Triago said. What's more, performance has sagged, most markedly on LBOs done at the peak. Since 2007, the industry's median return has been 6 per cent a year, below the 7.5 per cent that many pensions need to pay retirees and far beneath the industry's historic average of around 13 per cent. Notable among the underachievers are many of the mega funds, multi-billion-dollar pools raised in the boom by brand-name houses like Blackstone, TPG Capital and KKR & Co.
'SOME CARNAGE'
Blackstone's $21.7 billion fund from 2006 had a2 per cent net annualised internal rate of return as of December 31, according to a Blackstone regulatory filing. TPG's boom-era funds — an $18.9 billion vehicle raised in 2008 and a $15.4 billion vehicle from 2006 — were generating returns of 2.5 per cent and a negative 4.9 per cent annually as of June 30, according to the California Public Employees' Retirement System, a TPG investor.
KKR's annual return on its $17.6 billion fund from 2006 was 6.9 per cent as of September 30. That combination of under-performance and funding needs has set the stage for a purge as investors pull the plug on the weakest firms. Only the scope of a shake-out is a matter of debate.
NEW YORK: Private equity, an investing trade plied by 4,500 firms with $3 trillion in assets, is bracing for a shakeout that's been brewing since the collapse of credit markets choked off a record leveraged-buyout binge. Firms that attracted an unprecedented $702 billion from investors from 2006 to 2008 must replenish their coffers for future deals and avoid a reduction in fee income when the investment periods on those older funds run out, typically after five years.
As many as 708 firms face such deadlines through 2015, according to researcher Preqin. Private-equity firms pool money from investors including pensionplans and endowments with a mandate to buy companies within five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 per cent to 2 per cent of committed funds and keep 20 per cent of profit from investments.
While fundraising is a routine part of the buyout business, today's environment is anything but. Many firms are suffering from below-average profits on their boom period funds and top executives from Carlyle Group co-founder David Rubenstein to Blackstone Group president Tony James say future returns will be far more modest than those investors got used to in the past. As investors gravitate to the best-performing managers and cut loose others, 10 per cent to 25 per cent of firms may find themselves without fresh money.
'RATHER MASSIVE'
"The shakeout will be rather massive," said Antoine Drean, chief executive officer of Triago, a Paris-based firm that helps private-equity firms raise money. Drean estimates that as many as a quarter of private equitymanagers will see their funding pulled by 2018. The firms are under growing pressure to invest the capital they already have.
About 28 per cent of the money raised from 2006 to 2008 has been paid back to investors, according toCambridge Associates, a Boston-based research and consulting firm. More than $100 billion, or 14 per cent, of the $702-billion raised, is yet-to-be invested dry powder that firms must use or lose by the end of 2013, according to Triago.
That's a record for dry powder set to expire in a single year, Triago said. What's more, performance has sagged, most markedly on LBOs done at the peak. Since 2007, the industry's median return has been 6 per cent a year, below the 7.5 per cent that many pensions need to pay retirees and far beneath the industry's historic average of around 13 per cent. Notable among the underachievers are many of the mega funds, multi-billion-dollar pools raised in the boom by brand-name houses like Blackstone, TPG Capital and KKR & Co.
'SOME CARNAGE'
Blackstone's $21.7 billion fund from 2006 had a2 per cent net annualised internal rate of return as of December 31, according to a Blackstone regulatory filing. TPG's boom-era funds — an $18.9 billion vehicle raised in 2008 and a $15.4 billion vehicle from 2006 — were generating returns of 2.5 per cent and a negative 4.9 per cent annually as of June 30, according to the California Public Employees' Retirement System, a TPG investor.
KKR's annual return on its $17.6 billion fund from 2006 was 6.9 per cent as of September 30. That combination of under-performance and funding needs has set the stage for a purge as investors pull the plug on the weakest firms. Only the scope of a shake-out is a matter of debate.
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