U.S. institutional investors are keeping their eyes on Europe's fund-raising climate because many have invested significant percentages of their portfolios in European private equity. More than 50% of the assets in European private equity funds have been committed by U.S. investors, and that is not expected to change.
"U.S. investors have an incredibly meaningful portion of most European private equity funds," Mr. Hirsch said. Much of the action in Europe is around large buyout funds; the middle- and small-market private equity markets are too new to talk about big trends, he noted.
Officials at $3.6 billion San Bernardino County (Calif.) Employees' Retirement Association, which in June made its first allocation to European private equity, are watching for the European fund-raising to begin. "We anticipate good groups to come to market and we're assuming that when our advisers are saying ‘good groups' that the returns will be there," said Don Pierce, investment officer.
He added that San Bernardino has invested in the asset class through two fund managers, Partners Group Inc. and Standard Life Investments, which manage $220 million each with full discretion — Standard Life with a fund of funds and Partners Group with a separate account.
Some of the firms that have started or are expected to begin fund raising for European market funds with at least €2 billion ($3.7 billion) each are 3i Group, Kohlberg Kravis Roberts & Co., Bridgepoint Capital, BC Partners Ltd., CVC Capital Partners and Apax Partners & Co. In all, Hamilton Lane executives expect 10 private equity firms to raise megabuyout funds for the European market beginning in the fourth quarter.
Private equity money managers have a finite period of time — about five years per fund — to make investments, said Norman J. Leben, executive vice president and managing director of private equity services at New York-based BISYS Private Equity Services, which provides advisory and administrative services for the private equity industry. The pressure to invest a stockpile of cash might force some managers to pay more for deals than they would have in a less competitive market, he said.
"We've seen pricing pressure over the last six to 12 months," said Tim Green, senior partner at GMT Communications Partners, a London-based private equity firm with €500 million under management that has focused most of its investments in middle-market European companies. These high prices paid for portfolio companies negatively affect fund returns, Mr. Green said.
"There is a lot of money looking for homes. Too much money, too few deals," Mr. Green said. "We are sensing an acceptance of target returns that are lower." Still, these reduced private equity returns are higher than those expected from the traditional stocks and bonds asset classes, he said.
U.S. consultants are projecting 12.2% private equity annual returns for the next year, compared with single-digit returns for bonds and public stocks.