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 $702bn 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 London-based researcher Preqin Ltd.
Bloomberg reports that private-equity firms pool money from investors including pension plans 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% to 2% of committed funds and keep 20% 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 LP co-founder David Rubenstein to Blackstone Group LP 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 - 25% of firms may find themselves without fresh money.
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