PE Expects New Investors, Despite Credit Crisis
Rothstein Kass survey predicts pressure on management fees in downturn.
June 11, 2009
Private equity shops should expect to see increased pressure on its fee structures as new investors will help prop up the asset class in the near-term. A survey from Rothstein Kass, a CPA, took viewpoints of more than 200 middle market private equity professionals and predicted that capital market weakness will last into next year, potentially hampering fundraising efforts.
This mirrors predictions professionals have made pertaining to pension funds backing away from private equity—in part, perhaps driven by recent scandal linking fund managers to PE professionals—and funds of funds and family offices increasingly making bets that portfolio managers will be able to realize returns.
Last month, at the Association for Corporate Growth’s Intergrowth Conference, Gijs Van Thiel, a managing partner at fund of funds 747 Capital, said this shift in the dynamic of how PE operates will create more fluid coordination of investors.
"We're speaking to our colleagues on a very regular basis,” he said. “That's the only way LPs will be able to apply any pressure on terms."
The Rothstein survey predicts pressure coming onto PE from all angles. More than nine out of 10 mid-market PE pros said they plan to see more regulatory requirements and oversight; about half felt there will be changes in the tax treatment of carried interest participants. Only 12% of survey participants in 2008 said more oversight would be forthcoming, providing a stark contrast.
The private equity overhang is currently at about $400 billion, according to a separate survey by The Alliance of Merger & Acquisition Advisors and Pitchbook Data. This could potentially grow, since credit markets are not believed to see sustained improvement until next year, which could in turn push PE players to hold onto cash to make larger buys until they can get more leverage.
About 80% of participants project they will have increased involvement with portfolio companies, also up from 2008. Two-thirds of the participants said they will feel more pressure regarding their fees; that figure tripled from 2008.
"Relatively poor recent performance has empowered some investors to be more aggressive in negotiating investment terms," said Tom Angell, principal-in-charge of the national commercial services group and private equity practices at Rothstein Kass. "However, we expect that over the long term most funds, particularly those that remain true to their overarching philosophies, will continue to attract capital under the common two and twenty structure."
However, there are potential bright spots; high net worth investors are expected to come into the space, the survey reported, and 83% of the survey’s respondents said they feel new investors will be counted upon as a source of capital.
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