Private Equity’s Future: The Elephant of Capital Scarcity

My editorial theme this month seems to be the future of private equity, from the perspective of capital availability. Institutional liquidity challenges had already made it tough for firms to raise new funds, and the Volcker Rule and proposed European regulations could take permanent bites out of the limited partner pie.

So let me throw one more thing at you: What if public pensions eventually switch from defined benefit plans to defined contribution plans?

I know this isn’t happening tomorrow or Saturday, but it will have to happen at some point (even if it takes a state “bankruptcy” to force the issue politically). And, when it does, private equity will lose its single-largest pool of capital.

Now it’s possible that, by that point, someone will have figured out how to make alternative investments work within a defined contribution plan – or laws will have changed for that purpose. And, even were state systems to switch, it would probably do so first for newer employees (as many corporations have done).

Again, it’s not an immediate concern. But for all the talk about the future of private equity, it surprises me that so few of the conversations involve discussion of capital supply – without which all the other issues are largely irrelevant.