Capital market weakness will last into 2010, leading to continued fundraising challenges, increased pressure on fee structures and greater regulatory oversight of the industry, according to a recently completed survey of middle-market private equity firms commissioned by accounting and advisory firm Rothstein Kass.
Results are included in “Private Equity in 2009,” a white paper report examining how shifting industry perspectives are shaping strategic positioning within the space. Findings suggest that while substantively all firms are looking to raise additional capital, management is cognizant of the significant challenges that still lie ahead.
Over 90% of respondents indicated that they expect credit market concerns to last into 2010, causing a similar percentage to report that they anticipate that it will become more difficult to raise new capital. Despite a generally negative short-term outlook for U.S. capital markets, private equity managers did express optimism that credit markets would improve during the second half of 2010, and over 94% of respondents also indicated that they do remain interested in raising more investment capital.
“The important role small- and mid-sized private equity firms play in the efficient functioning of capital markets affords a unique perspective on economic conditions. In 2008, for example, participants in our initial survey of private equity trends correctly predicted that the credit crisis would worsen over the balance of the year. This did not discourage aggressive fundraising efforts within the sector, however, as firms sought capital to pursue undervalued assets,” says Tom Angell, principal-in-charge of the national Commercial Services Group and Private Equity practices, Rothstein Kass.
“In 2009, fundraising intent remains remarkably consistent, with over 90% of participants again suggesting that they are seeking more money to invest. New investors are seen as more likely sources than existing clients, with direct and indirect investment from high-net-worth individuals outpacing institutional asset flows.”
The 2009 survey was based on interviews with 226 managing partners at middle market private equity firms. Survey participants oversee at least one private equity fund, with total firm assets under management between USD50 and USD300 million. Research for “Private Equity in 2009” was conducted by Russ Alan Prince, a leading authority and counselor on private wealth, and Hannah Shaw Grove, a widely recognized expert on behaviors and finances of wealthy individuals.
Where applicable, findings are contrasted against 2008 results to provide more in-depth analysis of anticipated regulatory and operational challenges. “Private Equity in 2009” also includes the results of a separate survey of 108 ultra-high-net-worth investors, each with reported net-worth of USD30 million or more, for their attitudes toward private equity investing. Notable findings of these surveys are included below:
Fundraising Intent:83% of respondents expect new investors to be the primary source of new capital77% list high-net-worth investors as an important source of new capital55% identified single-family offices as an important source43% indicated that institutional investors will be an important source of new capital
Operational / Fees:79% of participants expect to have greater involvement with portfolio companies (63% in 2008)66% of survey respondents expect increased pressure on fees (22% in 2008)71% expect increased pressure on management fees56% anticipate pressure on carried interest participants
Regulatory:93% of survey participants expect increased regulatory oversight (12% in 2008)92% expect enhanced disclosure requirements48% anticipate changes in the tax treatment of carried interest participants
“Though only a small percentage of our 2008 respondents anticipated this shift, enhanced oversight of the investment management community now seems a foregone conclusion. While legislative measure can restore trust by creating greater transparency, managers have been skeptical of regulatory proposals that fail to differentiate between private equity funds and other alternative asset classes. They also generally oppose legislation that would undermine proprietary strategies or require disclosure of limited partners,” says Jeff Kollin, a director in the Financial Services Advisory practice, Rothstein Kass.
“At the same time, Federal programs intended to support the stagnant asset-backed markets, such as PPIP and TALF encourage private investment, creating compelling investment opportunities for funds that meet the US Fed’s stringent criteria for participation.”
Cultivating the Wealthy (survey of 108 ultra-high-net-worth investors)73% of survey respondents currently invest in private equity24% are highly satisfied with current private equity investments66% would consider investing in the sector today93% are concerned about exit strategies82% expressed concern regarding the ability to source deals76% reported concerns about vetting methodology
“Some good news for private equity firms seeking additional investment from high-net-worth constituencies is that the community remains largely receptive. While reporting a low level of satisfaction with current providers, two-thirds of those surveyed would still consider investment in private equity today. However, they readily voice concerns regarding the industry’s ability to identify and vet suitable investments, and regarding exit strategies,” says Angell.
“With the IPO pipeline and capital markets still stagnant, nearly 80% of survey respondents suggested that they will become more involved with portfolio companies to unlock inherent value. Fortunately, during the course of years of fierce competition, many small- and mid-sized private equity firms have established themselves as niche players. Whether through market-driven strategies or vertical industry expertise, these firms have a long track record of collaboration with portfolio companies that will serve them well in a shifting competitive landscape that favors longer-term investment.”
The full report is available on the site of Rothstein Kass.
L.D.