Private equity fundraising lost some of its sparkle in the third quarter, according to Buyouts editor Greg Roth. U.S. pension funds, endowments and other limited partners all have began to pull back in the wake of renewed market upheaval and the possibility of a double-dip recession. What this means, according to private equity executives and placement agents, is the likelihood of intensifying competition for a shrinking pool of money.
That could ultimately lead, they say, to a bitter reckoning for a growing number of firms as the money that these firms hoped to raise simply isn’t there. If the trend holds, greater competition for less money could also foreshadow cuts in revenue and employment at private equity firms, and further tilt the balance of power between LPs and general partners—as far as terms and fees—more squarely in favor of LPs. Despite the third quarter slump, the fundraising market this year still has a solid chance of surpassing the depressed amounts raised in 2009 and 2010. Indeed, by recent historical standards, current fundraising levels are a mere fraction of what they were prior to the financial crisis.
“I get the feeling that investors are getting a lot more careful,” said Bill Barnum, a partner at Brentwood Associates, a middle-market buyout shop in Los Angeles that anticipates raising its next fund within a year. “And it’s probably going to be even worse in the fourth quarter. A lot of LPs are out of money by the end of the summer. In the end, that probably makes fund sizes a little smaller and the fundraising process a little longer. And at the margin, it will probably squeeze some people out as well,” he said.