September 1, 2011

Private Equity Shows Positive Signs Amid Challenges: SEI Survey

Steep climb ahead to reach heights of ’06 and ‘07

After languishing in the years since the global financial crisis, the private equity sector is beginning to perk up. Existing funds are being deployed, new ones are being raised and investor allocations to are slowly increasing, according to a new study.

SEI, in partnership with Greenwich Associates, on Wednesday launched a three-part series detailing the results of a survey of 411 private equity fund managers, investors and consultants in the U.S., Europe and Asia.

Summarizing the overall findings of the survey, SEI said that fund managers and investors alike are relieved to see strong signs of a recovery, including the accelerated pace of exits during the first half of 2011.

The second quarter alone saw more than 300 exits worth an aggregate value of $120 billion, up from the previous record of $82 billion set in the fourth quarter of 2010.

But SEI cautioned against assuming that the growing number of IPOs and sales signal an imminent return to the boom years of 2006 and 2007.

The industry still faces serious challenges:

  • “Dry powder” in excess of $400 billion is likely to keep many fund managers focused on making, managing and exiting investments rather than raising capital in 2011.
  • Climbing valuations are good news for those monetizing their assets, but less welcome for those looking to deploy capital.
  • Average holding periods for private equity portfolio companies have reached five years and many are still underwater. The current crop of profitable exits represents low-hanging fruit.

As institutional investors assess the role of private equity in their portfolios, they are concerned. “A lack of liquidity continues to haunt some investment committees, and many struggle to ascertain current value and risk exposures,” SEI said.

These issues are likely to manifest themselves in a variety of ways going forward. Downward pressure on fees will be exacerbated by the huge stockpile of unutilized capital and lackluster performance of recent fund vintages. There may be pressure to reduce the size of some funds. And investors will likely continue to press their fund managers for more detailed information.

SEI released the first part of the survey, “The Logic of Fund Flows,” on Wednesday. This analyzes where, why and how institutions invest, asset allocation trends among investors and how private equity fund managers are evaluated and selected.

 “Part II: Searching for Alignment,” to be released later this year, explores several challenges facing investors and fund managers, contrasting perspectives on transparency and the operational investments and budget priorities among fund managers.

“Part III: Turning Client Knowledge into a Competitive Advantage” examines obstacles facing fund managers, changes they are making to better serve clients and attract capital and factors keeping investors from raising allocations to private equity.

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