Even with a number of buyout funds in the range of $3 billion to $5 billion, general partners are complaining they don't have enough money to do the deals that are out there, Mr. Larsen said.
"That's (buyout) the place where a lot of money can go to work. The next question is, with that size of funds, can you get returns you have historically been looking for?" he said.
On the venture side, most of the highly sought after venture capital funds already raised money in 2004, said Parag Saxena, managing partner with INVESCO Private Capital, New York.
"These funds get a disproportionate amount of money," he said.
Unlike buyout funds, the average venture capital deal price is expected to drop, Mr. Saxena said. Venture capital funds are 25% to 35% smaller with some brand-name funds like Sequoia Capital being 20 to 30 times oversubscribed.
"That creates an imbalance and so there is not a lot of (second and third) rounds of financing, which is reflected in pricing, and that will continue," Mr. Saxena said.
Mr. Larsen said he expects more pension funds to reduce their target allocations to private equity. However, they will be making the change in response to the increased asset size of their entire portfolios caused by the recovering stock market. "Conceptually, it's a mathematical problem," Mr. Larsen said. "It's more mathematics than belief in the sector."
In the hedge fund arena, firms are increasingly encroaching on mezzanine investing, said William McCormack, partner and co-chair of the private equity group of Ropes & Gray, a New York law firm.
"The hedge funds are getting more and more into mezzanine," Mr. McCormack said. The difference between private equity and hedge funds is getting more and more blurred, he added.
Another trend expected this year is the outgrowth of private equity teams from the most sophisticated pension funds and endowments into separate management companies. This model, loosely follows the Harvard model, where a separate entity manages the university endowment and pension funds, Mr. Larsen said.
The teams will continue to manage the money for the sponsor but it will be a self-contained unit separate from the sponsor, he said. Part of the attraction is getting out of the bureaucracy of the large institutions.
Looking overseas, some observers say the buyout markets and Asia are going to take off in the next 18 months.
"What I find is European and Asian investors have spent a lot of their allocated dollars," said Mr. McCormack. "American investors are behind and have so much more money to invest."
This means more U.S. investors could begin to invest in Europe and Asia this year.
After disappointing investments with private equity managers investing in China in the early 1990s, some institutional investors are either making smaller commitments or doing more research, said Raymond F. Henze, group managing director of international private equity and real estate for TCW, Los Angeles.
‘There's been a sea change. Funds are making money through buyout and growth (private) equity and it's bringing people who were on the sidelines," Mr. Henze said.
Brand-name buyout firms like CVC Capital Partners, Carlyle Group and JPMorgan Investment Management, are preparing to raise China funds, Mr. Henze said.
"There's a number of funds with Asia, China, India or Russia — a number of country-specific funds — coming together," KPMG's Mr. Larsen said.
However, whether these funds make money will depend on if they can make exits by either selling the company or taking it public, which may be more difficult in a less developed economy like China's.
"The big question in most markets is how do you exit," Mr. Larsen said. "If you don't have a fully functioning stock market, there won't be IPOs and then you have to recapitalizations or sales as exit options. … If you have a good exit strategy, then it works."