Friday Letter: You've never had it so good

Any doubts about the short-term future of the private equity industry have failed to dent the confidence of US firms, which are planning for aggressive expansion.  

Much larger funds, generous compensation packages and staff expansion are all in the works, suggesting the private equity industry is far from slowing in 2007.

The 2007 North American Private Equity COOs and CFOs Forum, hosted by PEO’s sister publication Private Equity International in New York this week, emphasised the confidence of an industry in rude health.

A fifth of the chief operating officers and chief financial officers polled at the forum said they planned to double their size of their funds in their next fundraising. Nearly a fifth of the managers are looking to bump up their fund size by 50 percent, while almost a quarter are planning to increase their fund size by 25 percent.

Just under a third of respondents are planning to keep their next fund at the same size as their current pool of capital.

To cope with this influx of cash, funds are also anticipating a concomitant rise in staff.

Forty percent of the respondents plan to increase their numbers by 10 percent or more in the coming year. And competition is heating up from within the industry and from hedge funds and banks.

“We’re back now to an economy where we are competing aggressively for talent,” said Laura Barker Morse, a human capital partner at early-stage venture capital firm Atlas Venture. “Now if you see a good candidate, don’t wait,” Morse advised. “Close.”

Existing staff are also sharing in the bounty. Sixty-one percent said their firms had included an increasing number of new professionals and junior professionals in the allocation of carry to improve staff retention.  Forty percent said they distribute their carry solely between the partners and other employees in an 80 to 20 ratio, leaving no carry for the general partner.

Only a quarter of those polled said that 2006 was their best year ever for distributions of carried interest. Nearly 40 percent said it was not one of their top three years.

Here lies the rub. As the firms expand to meet investor demand the returns are not looking as rosy.

But investors cannot help themselves: Coller Capital’s Global Private Equity Barometer this week suggested firms looking to increase their fund size should do so comfortably. Investors are happy with the returns and around half of those polled by Coller expect to increase their allocations, despite expecting a drop in returns.

Managers have never had it so good. Investors by contrast are fast-becoming beggars not choosers.

The full results of the 2007 Compensation Survey will be published in Private Equity International’s February issue and a future edition of Private Equity Manager.