We Have Nothing To Fear But Fear Itself. . . Or Lack Of Alignment, Too Much Leverage and Too Much Money

Every year, Probitas Partners does a survey of institutional investors to take their temperature on the private equity market.In a summary question, wealways ask what their fears are, ranging from the ubiquitous “Too much money chasing too few deals” to “I’m afraid I can’t access the funds I want, either in the size I’m looking for or at all.”

Over 320 investors from North America, Europe and Asia responded to this question this year, with the top three fears focused on the large buyout market, as noted below:

  • Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors.
  • The amount of leverage in the buyout market is unsustainable.
  • There is too much money available in the large buyout market and that will dramatically impact future returns.

Though investors continue to write very large checks to very large funds, they do seemed concerned about what is happening in the market, a feeling confirmed by their selection of Distressed Debt for Control funds as the most attractive niche sector in private equity now.

Interestingly, we also allowed respondents to respond directly with their fears in addition from choosing items from a pre-set list. The following selected responses were illuminating:

  • Too many investors just follow the herd.
  • Other LPs are throwing money at funds with little to no diligence.

It is not just those darn GPs that are causing the problem, but their investing compatriots who aren’t showing discipline.

If you are interested in a copy of the Survey, please ping me at kkd@probitaspartners.com