Private Equity Fundraising Will Revert to the Norm in 2005

In its latest Private Equity newsletter, the consulting firm predicted that fund sizes will shrink “dramatically” in the near future, especially in the venture capital markets. Institutional firms with a long track record have benefited from this recent trend, according to Mercer, but second- and third-tier firms without such records have not had similar success.

“Ironically, the increased demand for private equity from institutional   investors combined with the lack of available funds coming to market are   combining to produce ‘a limited partner overhang,’ where investors havea large amount of capital available with limited deployment options,”said Caroline Aboutar, a senior consultant with Mercer IC specializingin private equity, in a press release.

How do firms get out of this? They often sell to other firms, and this is better for the seller than the buyer on average, Mercer said.

How can institutional investors make it so their investments get the most bang for the buck? Although investors rarely have control over the actions of their private equity investments, Mercer suggested that institutions playing a role on partnership advisory boards or in annual meetings will have a greater influence in such firm-to-firm deals.

Institutions have recently been storming into the private equity world in a quest for better returns and diversification. In the past few weeks,   the Massachusetts Pension Reserves Investment Management Board  earmarked $278 million  for new private equity placements, andMississippi made a move to invest up to 10% in these alternative vehicles, while New York City has decided to double its investment in such vehicles (See  Mississippi Allows Pension Fund to Allocate 10% to Private Equity and  New York City to Double Private Equity Investment ). In November, New Jersey decided to make a similar move and the Governor of New Mexico is also expected to sign a similar law that would allow that state’s pensions to invest in private equity.

A copy of the newsletter is free for subscribers at www.merceric.com .