According to the story, there are currently some 183 private equity fund managers in runoff. The 183 funds is more than double the 90 that were in runoff in 2009. Another 150 firms are expected to disappear this year, Financial News said.
I was a little surprised by the high number but then saw that there are 4,146 PE firms now in existence. The 183 is about 4.5% (by my math). So what is a run off? This happens when PE firms fail to raise a new fund to make new investments. They just manage the portfolio they have. It is the private equity equivalent of going out of business, Financial News said.
One private equity exec says the totals cited by Preqin are possible. “Between Dodd Frank costs, turnover and bad performance it makes sense,” the source says. “In fairness, some are firms that have been in runoff for a decade already.”
To be sure, fundraising this year has been tough for all firms. And there are several PE shops rumored to be in runoff (Ferrer Freeman, the Cypress Group, Quadrangle, Cornerstone Equity, etc.).
The numbers still sound a little fuzzy to me. So I went to Preqin and asked them for the specific names of firms that were going out of business. They wouldn’t provide them. In fact, Preqin couldn’t guarantee the individual firms are actually out of business, according to Tim Friedman, a firm spokesman.
To determine which firms are in runoff, Preqin found which PE firms raised a fund in 2001 and then looked to see which shops haven’t raised a fund since. Preqin used that information to estimate which firms will cease operations this year, Friedman said in an emailed response to questions.
“In reality, lots of those firms will still be active for a couple more years, some may raise another fund or go deal by deal, and others went out of business a while ago,” Friedman wrote. “We believe it all averages out in the end and that number is a pretty good estimate, but we can’t give names out, I’m afraid, as we cannot guarantee the individual firms are actually out of business.”
Friedman said the numbers cited by Preqin are estimates that are “based on hard data.”