The US middle market may be headed for rough times ahead as competition for deals in the increasingly overcrowded sector causes firms to overpay, warned Hamilton “Tony” James, the recently appointed president of New York-based private equity firm The Blackstone Group.
According to James, middle market firms may struggle to find profitable investment opportunities. “There are just too many mid-market funds,” he noted in an interview with Bloomberg last week. “There is no reason for there to be 200 mid-market buyout firms in the US.”
James’ comments come on the heels of similar remarks recently made by Mark Anson, chief investment officer of the California Public Employees Retirements System (CalPERS). According to Reuters, Anson told listeners assembled at the International Fund Management 2005 conference that the biggest asset bubble right now is private equity. “The current overhang of leveraged buyouts committed but not invested is $182 billion. A lot of money is chasing high yield. Hedge funds are competing with buyout managers and that convergence scares me.”
While Anson’s comments referred to the private equity industry as a whole, James’ remarks claimed that it will specifically be funds with less than $1 billion who will struggle in the face of a congested playing field.
In 2002, The Blackstone Group closed the biggest fund ever, Blackstone Capital Partners IV, on $6.5 billion.
As middle market firms are forced to overpay, subsequent returns will be negatively impacted. Investors, James noted, will eventually flock to the largest funds because they generate the biggest returns.
Blackstone’s largest-fund status may eventually be overshadowed by a number of other firms who are looking to raise mega-funds in 2005, including Warburg Pincus, KKR and the Carlyle Group.