Buyout and Venture Capital Funds Fuel Private Equity Performance in 2006

According to Mercer, the increase in buyout fund returns was fueled by one of the strongest merger and acquisition markets since 2001 and the venture capital sector posted moderate returns despite an undistinguished year of initial public offering (IPO) activity.

Fundraising by the two sectors is expected to surpass 2005 records, with buyout funds attracting the majority of the capital as robust investment and realization activity were pushed along by a buoyant stock market, resilient exit markets and an accommodating debt market.  

“To an increasing degree, we have seen larger buyout funds in the market well before they have prior fund returns or realizations to demonstrate to investors,” said Caroline Aboutar, a senior consultant with Mercer. “These buyout managers argue that they have gained additional capacity, expanding the investment universe through global investing and by investing in larger deals.”

Michelle Simmons, a research associate with Mercer also discussed in the newsletter the convergence of private equity and hedge funds, with both groups looking to boost returns, raise more capital and diversify risks.

“Convergence allows both hedge fund and private equity managers greater choice and flexibility in deploying raised capital, but it also creates a more competitive market and it makes reasonably priced investments harder to find,” Simmons asserted. She added that new funds might experience difficulties in terms of structuring, valuations and returns because regulations and protocol for private equity and hedge funds are different.

Mercer IC’s private equity newsletter may be downloaded by subscribers at  www.mercerIC.com .