Strong Private Equity Market Could Leave Investors Scrambling For Top Fund Managers, Report Finds

Urged on by the growing equity markets, institutional investors are investing new money in alternative investments. But with the rush of institutional money chasing the limited capacity of top tier managers, there is a danger that many investors will be

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Urged on by the growing equity markets, institutional investors are investing new money in alternative investments. But with the rush of institutional money chasing the limited capacity of top-tier managers, there is a danger that many investors will be disappointed in future returns, warns Mercer Investment Consulting, Inc., in a new report.

Despite recent years that have shown otherwise, investing in high-quality, top-tier private equity managers with significant experience and investment discipline should provide investors with a high probability of generating strong returns, suggests Mercer IC in its first-quarter private equity newsletter.

Private equity markets generated strong returns in 2005, dominated by the small-to-medium buyout market sector. Venture capital returns were buoyed by stronger IPO and M&A markets but continue to be plagued by the technology bust of 2000, which continues to be a drag on performance.

Encouraged by robust investment activity and the realisation of profits from investment ventures, the first three quarters of 2005 saw an upsurge in private equity fundraising compared to the same period in 2004.

“As a result of increased demand for private equity and a lack of quality investment managers in the market, slots in top funds were hard to come by,” said Caroline Aboutar, a Chicago-based senior consultant with Mercer IC who specializes in private equity. “There has been a power shift. We’re seeing fewer examples of limited partners achieving investor-friendly terms. By contrast, there are more examples of general partners compressing fundraising schedules and insisting on solid commitments before limited partners complete formal due diligence.”

The private equity market in Europe is similarly strong.

“Within non-US markets, European private equity managers within the buyout sector have raised large sums of assets and face similar issues to those in the US,” according to Sanjay Mistry, a London-based senior consultant with Mercer IC specialising in private equity. “With many changes taking place in the European private equity market, managers have lately attracted significant capital as many limited partner allocations are now equally split between the US and European buyout markets.”

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