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Fewer PE GPs expecting carried interest, says new research

New research from Investec Fund Finance indicates that private equity professionals are less confident about receiving carried interest from their current fund than they were 18 months ago.

While three quarters (76%)(1) of general partners (GPs) within the private equity industry still expect to receive carried interest from their current funds, Investec’s research shows that this is a 6% fall compared to the 83% who believed their current fund would generate carry for them in August 2009.

Despite this, more than three quarters (77%) of GPs surveyed believe that carried interest still represents their main opportunity for future personal wealth creation (compared with 79% in 2009). This optimism may be explained in part by the positive outlook that the majority of GPs have for the UK economy, with 81% expecting the economic environment to improve over the next 12 months.

One in four (26%) private equity professionals also says they are completely reliant upon carried interest as a means of investing in future funds. However, the slightly dampened expectations for receiving carry to do not appear to be weighing on GPs’ minds when planning their next funds, with 43% of those surveyed saying that their next fund will be bigger than the current one.

In addition to their revised expectations for carried interest, Investec’s research also reveals a significant change in terms of private equity firm’s priorities compared to 18 months ago.

Over the next 12 months, the majority of GPs say their company will focus on restructuring and refinancing portfolio companies, whereas 18 months ago these activities were ranked as being of the lowest priority. The survey also revealed how making new investments have slipped from being of the highest priority in 2009 to amongst the lowest for 2011 even though most funds have significant undrawn commitments, and are quickly approaching the end of their investment period.

Simon Hamilton, Investec Fund Finance, says: “Overall sentiment amongst General Partners remains positive with the vast majority believing that carried interest is still achievable from their current funds and will be their main source of wealth creation.  Although these levels of optimism aren’t quite on a par with 18 months ago – perhaps a symptom of overconfidence in 2009 – GPs remain enthusiastic about the outlook for UK economy and that is encouraging.

“It will be interesting to see going forward how GPs’ manage investors’ expectations around the amount they will personally commit to their next fund. Our research shows how reliant they are upon carried interest for their commitment. This sentiment has been consistent with more funds approaching us to help them finance their personal commitment.”

The Investec Fund Finance team focuses on the financing needs of leading private equity funds and the professionals behind them. Investec offers a broad range of financing facilities tailored to the unique requirements of the private equity sector. Typically, the loan sizes are greater than GBP5 million and can extend to between GBP50 million and GBP100 million at the higher end. The loans are usually structured against the private equity investments, management company cash flows or investor commitments. 

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