State of the Private Equity Market

I decided that I would contribute what I see happening in the private equity markets. There are so many things going on, but I’ll focus on a couple issues at present and then some forecasts of future movements.

Presently, I think the hottest issue in private equity is what are people doing with their money, LPs and GPs alike. LPs just finished off commitments for the year, but aren’t in nearly the rush to commit that they have been the last couple years. I believe this is fueled generally by market turmoil, but more importantly it’s a matter of portfolio allocation. As the public markets were hot portfolios increased, in addition a number of institutional investors also increased their asset allocation to the PE class, this created the need to rebalance portfolios and put money to work in places other than traditional equity and bonds. GPs on the other hand are flush with cash for the most part, coming off the last couple years that were great for fundraising, but with credit in its present state they are less aggressive and the deal sized have come down. The question is, there are still a large number of funds who need to put their money to work.

For the future, there are a couple things happening that I see developing more down the line. For one, secondary interest have increased. This is not new, but what it leads to is something quite interesting. There are a number of banks who have already put together trading platforms for unregistered equities. These include companies that want to have liquidity for their equity, but don’t want to have the restrictions and regulations of publicly traded companies. This may have a large effect on the private equity market, giving GPs another route to exit companies. How it affects me in my job, is I can see the day that when a private equity fund wants to raise money they will do it through one of these unregistered equity platforms instead of the traditional fund raise. Why would they do this? For the liquidity of course. There are a number of funds that are already displaying how much they want liquidity, take The Blackstone Group, or Fortress, don’t forget that KKR still wants to take his fund public, but now at the “right time.” If this becomes the norm, we might see a market develop for hedge funds and private equity funds where they become like mutual funds in the public markets. Of course this is a ways away, but that’s the purpose of forecasting.

I welcome any comments and questions,

-Michael