LEX Problem? What problem? Credit is frozen, equities are manic and several big leveraged buy-outs have collapsed in acrimony. Yet money continues to pour into private equity’s coffers.
Blackstone has just raised its largest ever real estate fund, worth $11bn. KKR has just closed a $18bn buy-out fund. Some $176bn has been raised globally by the industry so far this year, according to Private Equity Intelligence. In part, this reflects a time lag from the salad days of early 2007. Raising a big fund is typically a formal process that lasts perhaps a year and is often backed by an informal permanent campaign of general schmoozing.
That said, there are several reasons why institutional managers remain on board. Asset allocation decisions are not made on the hop, so it would require an extended period – say another six to nine months – of minimal deal flow to force a big rethink. Investors tend to pick trusted managers and stick with them over the long-term – something that ought to benefit big brands such as Blackstone and KKR in particular.
Moreover, while it is clear that last year big, risky LBOs were completed at the top of the market, private equity has some insulation. Exotic, covenant-lite debt mitigates the risk of bankruptcy. And a multi-year holding period, away from daily market swings, provides an option on recovery. Looking ahead, distressed markets with low liquidity will eventually play to private equity’s strengths and could produce good returns even if funds of recent vintage prove lacklustre. A big blow-up of an existing investment or extended deal drought would probably cause some investors to pause. Even if temporary, this would be painful for an industry positioning itself for stratospheric growth. At present, there are more than 1,400 funds on the road seeking to raise some $804bn – roughly equal to the amount of uncalled capital already on hand.
