Venture capital and buyout funds are deploying record amounts of capital with an increasing speed that could raise the risks for institutions and leave the market "frothy" if interest rates rise or the stock market stalls, according to Mercer Investment Consulting's January private equity newsletter. The M&A market in 2006 was one of the strongest since 2001, with buyout funds averaging a gain of more than 25% and venture capital funds posting a "respectable" 15.6% return, Mercer noted.
In a telephone interview, Senior Consultant Caroline Aboutar said the more rapid deployment of capital by megafunds is raising the profile of "financial engineering" in place of the "operational engineering" in which private equity investors get involved in managing target companies back to health. With buyout and venture-cap investors raising capital for the next megafund well before earlier funds have "returns or realizations," investors in the newer funds may not be able to judge how such shifts in emphasis are working, leaving them vulnerable if the market environment worsens, she said.
