Uncommitted Private Equity Assets Could Prove Problematic

February 16, 2011 (PLANSPONSOR.com) – Private equity investors need to be aware of a potential problem in how the industry puts to work a balance of capital committed before the economic crisis but still uninvested, according to a Segal Advisors research note.

The Segal publication said this “overhang” of uninvested funds may end up pressuring private equity funds to accept weaker performance from commitments made for those funds.

Segal said the problem deals with funds raised during 2006, 2007 and 2008 and the tough new underwriting standards put in place by banks in 2008, which Segal said have proven a major impediment to put that money to work. With strong economic uncertainty, private equity firms had a tough time to value transactions with confidence. Blocked from exiting prior deals and saddled with new commitments from fundraising in 2006, 2007 and early 2008, private equity fund managers faced a bottleneck.

Segal said while all private equity faced a marked slowdown in transactions, the buyout segment came under particular pressure. Until the collapse in global liquidity, the amount of money deployed by private equity firms with a focus on buyouts had blossomed because of easy bank lending terms. However, as of September 2010, more than half of the buyout capital raised during 2007 and 2008 remains uninvested.

This overhang leaves a great deal of capital available for buyouts. However, a global trend toward deleveraging remains firmly in place, keeping a lid on prices that buyout managers can obtain when earlier deals are sold or exited. So far, these factors have resulted in a piling up of capital in buyout funds seeking investment, Segal contended.