The Great Debate UK

from The Great Debate:

The future is smaller for private equity

Margaret Doyle-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

Investors' faith in banks may be reviving, but 2009 is shaping up as a year of reckoning for private equity. Two of Europe's most prominent listed buyout funds -- Candover Investments and SVG Capital -- are considering their options, with sale or dismemberment a serious prospect.

How the mighty are fallen! For more than a decade, the listed PE funds outperformed the market, and the managers earned rich fees nicknamed "2 and 20" -- 2 percent of funds under management and 20 percent of performance above a certain benchmark. But that outperformance has disappeared in little more than a year with many funds languishing in the "90 percent club" of shares that trade for less than 10 percent of their peak. Funds are blaming a killer combination of lousy returns, a debt drought and an investors' strike.

Even when the current storm abates, PE will be a smaller, humbler industry. For starters, many PE funds are so cash-strapped that they are unable to meet their commitments to invest in the latest funds. In Candover's case, it had to allow other investors to scale back their commitments to the 2008 fund too. Moreover, it has suspended all investments from its 3 billion euro 2008 fund and to levy fees only on that tiny portion of the fund already invested.

This recognition of commercial reality will cost in the region of 25 million pounds this year. It is a sign of the new balance of power between PE firms and their investors.