Monday, July 17, 2006

Funds Flowing Into Private Equity Excessive

There have been a lot of money flowing into venture capital coffers as because firms with strong track records are attracting the money. Firms such as KKR, Carlyle and Texas Pacific have been garnering billions over the last couple of months. Last week saw more of the same when New Enterprise Associates raised a US$2.5 billion venture fund, and the Blackstone Group raised a US$15.6 billion private equity fund, the largest ever. In the private equity universe, buyout firms like Blackstone raise substantial sums from institutional investors to combine with loans to take companies private. Venture capitalists, a much smaller portion of the private equity world, raise money from institutional investors to start and build companies.

These firms aim of an annual 20% return over the medium and longer term. How the hell do you invests US$15 billion? Plus now you are competing with a few US$10 billion sized private equity funds as well for the same companies to invest in. Hence now you find more unlikely companies being bought up by these big private equity firms as they have to get creative, plus they have to seek more opportunities from foreign shores. It's those type of returns that have opened the floodgates on capital flowing into private equity's buyout and venture funds.

Many of the offices that venture firms are opening in China, India and elsewhere around the globe will be shuttered in a few years given the localized nature of building companies and the industry's track record in being reluctant to weather downturns in these distant markets. However, over thexy year or two, we shall see a surge in M&A activity in Asia led by the US private equity firms - in a way, that will shore up investment interest in selective sectors as well. This will also lead to more arbitrage and hedge fund activity in Asia. They all go hand in hand.

1 comment:

oli said...

If a private equity firm can't find suitable investment opportunities, it will not draw on an investor's commitment. Given the risks associated with Los Angeles equity investment , an investor can lose all of its investment if the fund invests in failing companies. The risk of loss of capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development, and lower in mezzanine capital funds, which provide interim investments to companies which have already proven their viability but have yet to raise money from public markets.