Investors may be worried that big buyout firms are changing their investing style, but it’s not stopping them from turning over more money to the asset class.
With credit markets at a standstill and the pace of private equity deal-making having slowed dramatically, almost three-quarters of institutional investors worry that private equity firms will stray into less familiar strategies or geographies in the quest to find a home for all of the capital raised in recent years, according to Coller Capital’s just-released Global Private Equity Barometer, a semi-annual survey of institutional investors. The survey included 103 institutional investors from North America, Europe and Asia.
They have good reason to worry about this so-called “style drift”; many of the biggest private-equity firms are already getting creative with their investment strategies. Some are taking minority stakes in public companies, such as TPG Capital’s recent investments in Washington Mutual and UK-based lender Bradford & Bingley. Others are pumping money abroad, particularly into emerging markets such as China, India or even Africa. Some firms — like Bain Capital, Carlyle Group and Providence Equity Partners — are even fashioning themselves as debt investors, either by raising dedicated debt funds or allocating portions of their recent buyout funds to purchase corporate debt, even in their own portfolio companies.
“People begin to feel the need to put money to work and start to drift off of the reservation,” said Peter Keehn, head of alternative investments at Allstate Investments. Keehn, who was speaking last week at InvestorSummit, a private equity conference sponsored by Institute for International Research, added that Allstate is monitoring the private equity firms in its portfolio for signs that they have strayed.
Despite their concerns, only 3% of investors in the Coller Capital survey plan to reduce their allocations to private equity, while the rest either plan to keep their allocations the same (59%) or even boost them (38%). Around 84% of investors also expect to see more new LPs come into the asset class over the next three or four years.
Granted, more of that capital is likely to wind up in smaller buyout funds, distressed-debt funds and mezzanine funds than in the big buyout funds, according to the survey. However, some of the biggest firms show no signs of voluntarily scaling back their big new funds. TPG has closed on at least $12 billion for its latest buyout fund, as our colleagues at LBO Wire are reporting. Meanwhile, Apollo Management rounded up at least $12 billion earlier this year.
The continued flow of capital into these funds begs the question: If the investors themselves don’t show discipline in putting out their capital, how can they expect discipline of the people who manage the funds?
Source: Deal Journal / WSJ