Private Equity
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The Shakeout in Private Equity

The Role of Investors in the Industry’s Renaissance
July 31, 2009 by Heino Meerkatt and Heinrich Liechtenstein
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This White Paper was written in collaboration with the IESE Business School of the University of Navarra.  IESE is one of the world's top ten business schools and has pioneered executive education in Europe since its founding in 1958 in Barcelona.

In our previous White Paper on private equity, we predicted that the financial and economic crisis would trigger a major shakeout in the private-equity industry, with 20 to 40 percent of the 100 largest leveraged-buyout (LBO) private-equity firms going out of business.  This prognosis was based on an analysis of the interplay of four key factors, including private-equity firms’ refunding sched-ules, long-term performance, recent deal activity, and exposure to crisis-prone industries. Ultimately, who will win and who will lose is in the hands of so-called limited partners—that is, the investors in private-equity firms, such as pension funds, funds of funds, banks, and sovereign wealth funds.

Our new research leads us to conclude that there is more available capital—also known as dry powder—than ever before and that limited partners will stay committed to private equity.  But the shakeout of the private-equity firms will continue, driven by a shift of power toward limited partners.

In addition, some limited partners will not be able to fund their commitments, and if they are anchor investors, this will increase the likelihood of taking their private-equity firms down.

This paper addresses three main questions:

  • Will limited partners be able to deliver the dry powder needed to sustain private-equity deal activity?

  • How will the liquidity pressures on different types of limited partners affect individual private-equity firms?

  • What impact will the liquidity pressure on limited partners have on the shakeout of the private-equity industry and how the industry operates?

To answer these questions, we created a proprietary database of more than 3,000 commitments by limited partners to private equity. This database draws from publicly available data on limited partners and private-equity funds, as well as from commercial databases—including Preqin’s Investor Intelligence, Thomson Financial, Dow Jones’s Directory of Alternative Investment Programs, and Dealogic. In addition, we conducted in-depth interviews with more than 30 limited partners and private-equity firms in the United States and Europe.

See Get Ready for the Private-Equity Shakeout: Will This Be the Next Shock to the Global Economy?, BCG and IESE White Paper, December 2008.
Dry powder is the capital committed by investors into private-equity funds minus both the capital invested by the firm managing the fund and the capital investors will not be able to provide: the truly undrawn commitment.
Throughout this paper, “private-equity firm(s)” refers exclusively to LBO private-equity firm(s).