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A Limited Partner’s Worst Fear

Any private equity investor facing cash constraints would have read this story from Reuters in complete horror.

The article, from this morning, proudly declares that private equity is getting ready for its comeback. The so-called “haves” of the buyout world–the funds that raised money before raising money became impossible–are gearing up to put all that sidelined capital to work.

“There are plenty of private equity firms with significant funds available to invest and a growing impatience to invest them,” said Michael Berry, head of debt advisory firm Versatus.

Once those firms start putting money to work, as we’re already starting to see with deals like KKR’s buyout of Oriental Brewery and CVC Capital’s deal for iShares, industry pros expect there to be a period where investors shell out millions of dollars to fund capital calls but receive no distributions from exits.

Which means, we may see some limited partner defaults.

They’ve been staved off thus far because of the lull in private equity deal flow. Investors haven’t needed to pony up the cash from their commitments. But just because deal flow is starting to show signs of life does not mean that exits, and therefore returned money to investors, will do the same. The size of deals getting done may not be large enough to include many private equity portfolio companies. Despite a brief moment in the sun with two education IPOs last month (Warburg Pincus’ Bridgepoint Education and ABS Capital’s Rosetta Stone), the IPO market remains cold. Further, a number of the mega-funds have said they’re in no hurry to do exits in a market with depressed deal valuations.

The Reuters story conveniently listed some of the “haves,” which are the firms that recently raised funds and are likely chomping at the bit to start spending them. The lists includes TPG, Apax Partners, Warburg Pincus, Apollo, Blackstone Real Estate, Bain Capital, First Reserve and Advent. Not present? Blackstone Group, which, we learned last week, hasn’t held a close on its sixth buyout fund since before last quarter. It’s stuck at $8 billion.

See earlier: Private Equity Calling the Bottom, Too, Will the iShares Rival Bids Have Seller Paper?, Don’t Try This Deal At Home: KKR’s Beer Deal Not For Lightweights