A potential shakedown of the private equity industry has dealmakers worried.

“Are there too many firms?” asks Huron Capital’s Gretchen Perkins, a panelist at the SBIA’s National Summit for Middle Market Funds event at The Breakers, Palm Beach, Fla. Citing the heated competition among  financial sponsors in attracting the attention of limited partners (LPs), Perkins wonders if investors are more cautious and less likely to return to large funds a second and third time.

“That’s the theory and it makes sense,” says LP and fellow panelist Chris Yang, (pictured) a managing partner of Grove Street Advisors. “The reality is it’s an enormously sticky industry.”

As deals begin to percolate in the lower middle market, LPs are beginning to prefer smaller funds, Yang explains. (For more on this trend, see “Small Deal Sweet Spot.” 

Other M&A professionals agree that LPs are now looking to make bigger bets in fewer funds, which will make raising new funds even more challenging for PE firms.

“It’s a problem,” says Joe Burkhart, a managing director at Saratoga Investment Advisors, which oversees the portfolio of business development company Saratoga Investment Corp. (NYSE: SAR). The number of what Burkhart calls “zombie” firms, or private equity firms that sit on assets and have inactive funds, is high. This  can make for unhappy LPs  as capital that could be returned or reinvested in other ways is held captive.

With more PE firms generating mediocre returns to LPs and unable to raise new funds, Burkhart says, “there will be fewer private equity firms tomorrow than there are today.”

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