The European debt crisis is exacerbating pressures on private equity managers doing business there, providing another challenge to their ability to sustain their businesses and keep talent.
“The market has expected a substantial number of managers to go out of business as a result of fundraising failure since the global financial crisis in 2008. The European crisis only amplifies those risks and makes them more acute,” Grant Roberts, partner and co-head of private equity advisory at Richmond Park Partners LLP, London, said in an e-mailed response to questions.
“Generally fund managers continue struggling to arrest and drive performance in funds where, for the majority, they will never trigger carry and will fail to ever raise another fund — a vexing challenge for institutional investors as significant remaining value will be increasingly at risk,” he said. Carry, or carried interest, is employee remuneration based on a share of profits a fund produces.
“Few fund managers and even fewer institutional investors have fully worked through plans to protect and maximize value when” managers face these risks to their businesses, Mr. Roberts said.
“Golden handcuffs” — the incentives to retain skilled investment staff — are “certainly not golden anymore,” said Antoine Drean, founder and CEO of private equity adviser Triago, Paris. “The people who became partners in 2006/2007 into buyout funds were offered carry. Some of them levered themselves to buy this carry. (Now,) most of this is worth zero, and might well be worth nothing in the life of the fund,” Mr. Drean explained.
Experts said the managers most at risk of losing staff and failing to raise new funds are those with poor performance. Other factors, such as investment strategy drift and timing of fundraising efforts, also play a role. Sources declined to name managers, but one source speaking anonymously said 80% of fund managers are struggling with some of these risks.
“There are two markets now (in private equity): One market is made of the good teams that attract money easily,” Mr. Drean said. The other comprises teams that might never attract new business again, he said.
Dutch firm Waterland Private Equity Investments BV topped the recently released 2011 HEC-Dow Jones private equity performance rankings. U.S.-based firms Friedman Fleischer & Lowe LLC, Platinum Equity LLC, Hellman & Friedman LLC and TPG Capital rounded out the top five. Rankings are based on combined performance of all of a firm's funds. Oliver Gottschalg, associate professor of strategy and business policy at business school HEC Paris, declined to provide the rankings of all 112 firms.