Private equity specialists at international law firm Eversheds believe that the private equity industry likely to struggle next year as institutions withdraw money due to the so-called den
Private equity specialists at international law firm Eversheds believe that the private equity industry likely to struggle next year as institutions withdraw money due to the so-called denominator effect, which is artificially boosting the proportion of their assets invested in private equity as falling share prices reduce the value of their allocation to traditional managers.
‘Deloitte is predicting that up to 50 per cent of private equity houses could shut or return whole funds next year,’ says Eversheds partner Robin Johnson. ‘Part of the problem is that limited partners like to have about 10 per cent of their funds committed to alternative asset classes like private equity.
‘But with present public equities sentiment, it is actually around 20 per cent which is too high for LPs. So when people say there is plenty of private equity money available that is not being used, the reality is the money may not be as committed as private equity houses think.’
His colleague Mark Spinner, head of private equity, says the result may be growing job losses in the industry. ‘It is highly likely that there will be job losses in the private equity industry as deal activity levels continue to struggle,’ he says. ‘Many of the younger executives have never experienced a real recession and may not have the right skills set to invest in difficult times.
‘In addition, we know that there are large teams sitting on their hands waiting for deal activity to pick up. These are expensive people, and if they were employed in a portfolio company, the private equity House would be the first to turn up the pressure to reduce overheads and force job losses.’
