Prepare To See Some Serious Carnage In The Private Equity Industry
From 2006 to 2008, PE attracted $702 billion in investment capital. However, since the financial crisis crushed their returns, investors have been moving their money elsewhere. Only the strongest funds will be able to fund raise adequately, and some estimate that 10-25% of PE shops will shut down.
Even the big boys are hurting here, (from Bloomberg):
Blackstone’s $21.7 billion fund from 2006 had a 2 percent net annualized internal rate of return as of Dec. 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 percent and a negative 4.9 percent 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 percent as of Sept. 30.
That combination of underperformance 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.
“There will be some carnage,” said Jay Fewel, a senior investment officer for the $73.5 billion Oregon state pension fund in Salem, Oregon, which has been investing in private equity for more than 30 years. “A lot of folks raised money in the mid-2000s, when it was pretty easy. Now there are probably too many funds out there.”
Sounds like PE shops are suffering from the same problem people say the hedge fund industry is suffering from — over saturation.