‘Don’t tie up all my money,’ LPs warn

Soaring valuations could prompt a strategy shift as GPs struggle to deploy capital.

“Nobody’s investing and LPs are frustrated. Don’t tie up all my money.”

That was the warning from a European family office active in private equity. The LP, who did not want to be named, is one of several becoming increasingly concerned over the investment pace of their general partners.

Private equity fundraising rose 12.8 percent to $411 billion last year, the highest total since 2008, according to PEI data. The number of funds that closed fell 16 percent from 646 in 2016, with the average buyout fund size up 45 percent year-on-year.

The dry powder was not reflected in deal count, which grew just 2 percent to 3,077 transactions – 19 percent fewer than in 2014, according to Bain & Company’s Global Private Equity Report 2018. Global buyout value grew 19 percent to $440 billion last year as stiff competition for high-quality assets drove valuations to a record 11.2x average EBITDA purchase price multiple for US LBO transactions.

Soaring prices have prompted some GPs to sit on the sidelines rather than overpay for assets, the report noted. This has prompted fears among some LPs that their capital is not being put to work fast enough.

“We’re noticing the slow down already – investment pace is slightly behind our expectations,” one European pension manager told PEI, noting that an inability to deploy capital could prompt some managers to alter their investment strategy.

“We’re having conversations with our managers about looking at complex transactions to keep entry multiples at the correct levels,” the LP added. “They need to find less-well performing companies to be able to pay below 10x entry multiples.”

The LP’s view was echoed by Guillaume Jacqueau, managing partner at Equistone Partners Europe, who told PEI that GPs should be willing to consider more complex deals amid growing competition for assets. Jacqueau’s comments followed a first and final close on €2.8 billion for the firm’s sixth flagship fund.

One wealth manager PEI spoke to was less concerned about the pace of deployment, instead criticising those who continue to commit to large funds despite lacking the capacity to wait longer for their returns. “It’s their own fault – if you don’t like it don’t keep increasing your commitment sizes,” the manager said.

“It’s like buying a first bike, then repeatedly upgrading to an even larger one. Eventually they buy a motorcycle and crash. Just buy a moped and be happy to ride about town.”