Capital market weakness will last into 2010, leading to continued fundraising challenges, increased pressure on fee structures and greater regulatory oversight of the industry, accordin
Capital market weakness will last into 2010, leading to continued fundraising challenges, increased pressure on fee structures and greater regulatory oversight of the industry, according to a survey of middle-market private equity firms commissioned by Rothstein Kass.
The findings suggest that while substantively all firms are looking to raise additional capital, management is cognizant of the significant challenges that still lie ahead.
Over 90 per cent of respondents indicated that they expect credit market concerns to last into 2010, causing a similar percentage to report that they anticipate that it will become more difficult to raise new capital.
Despite a generally negative short-term outlook for US capital markets, private equity managers did express optimism that credit markets would improve during the second half of 2010, and over 94 per cent of respondents also indicated that they do remain interested in raising more investment capital.
"The important role small- and mid-sized private equity firms play in the efficient functioning of capital markets affords a unique perspective on economic conditions. In 2008, for example, participants in our initial survey of private equity trends correctly predicted that the credit crisis would worsen over the balance of the year. This did not discourage aggressive fundraising efforts within the sector, however, as firms sought capital to pursue undervalued assets," says Tom Angell, principal-in-charge of the national commercial services group and private equity practices at Rothstein Kass. "In 2009, fundraising intent remains remarkably consistent, with over 90 per cent of participants again suggesting that they are seeking more money to invest. New investors are seen as more likely sources than existing clients, with direct and indirect investment from high-net-worth individuals outpacing institutional asset flows."
The survey also found that 83 per cent of respondents expect new investors to be the primary source of new capital, with 77 per cent listing high-net-worth investors as an important source of new capital and 55 per cent identifying single-family offices as an important source. A further 43 per cent indicated that institutional investors will be an important source of new capital.
In addition, 79 per cent of participants expect to have greater involvement with portfolio companies, up from 63 per cent in 2008, while 66 per cent expect increased pressure on fees (22 per cent in 2008).
The vast majority (93 per cent) of survey participants expect increased regulatory oversight compared to just 12 per cent in 2008. A further 92 per cent expect enhanced disclosure requirements and 48 per cent anticipate changes in the tax treatment of carried interest participants.
