Investors turn their backs on mega-funds - Madoff Fraud

Investors turn their backs on mega-funds
By Martin Arnold in London
Published: January 18 2009 23:34 | Last updated: January 18 2009 23:34
Investors are turning hostile to “mega-buy-out” groups as many of their heavily leveraged, multi-billion-dollar takeovers of large companies are hit by the financial and economic crisis, according to research published today.

More than half of investors plan to cut their investment in the biggest buy-out houses in 2009, according to a survey of 150 limited partners (LPs), including insurers and pension funds, by the private equity advisory boutique Almeida Capital.

“This year LPs are more likely to throw rocks at mega-funds . . .  than commit capital,” said Richard Sachar, managing director of Almeida. “LPs are looking elsewhere harder than ever for attractive opportunities.”

Large buy-outs ranked bottom of 12 types of private equity, with less than a fifth of investors considering them an attractive investment this year. “There is quite a lot of hostility among LPs about feeling betrayed by these mega-funds,” said Mr Sachar.

The “mega-buy-out” houses have grown rapidly in recent years by generating big profits from acquiring large companies with a sliver of their own investors’ money and big bank loans.

But the party ended as banks virtually stopped lending to leveraged buy-outs. Also, some of their portfolio companies are struggling to cope with debt.

The shift in sentiment has already forced some of the biggest buy-out groups – including Carlyle Group, Kohlberg Kravis Roberts, Madison Dearborn and Blackstone – to scale back fundraising targets for this year.

Others, such as TPG in the US and Permira in the UK, have been forced to shrink existing funds by offering LPs the chance to reduce their outstanding commitments.

“Some of these mega-funds were one-trick ponies. They relied too much on leverage, so they are not going to raise the size of funds they did before and will have to retrench,” said Mr Sachar.

The survey found more than three-quarters of investors said their allocation to private equity would stay the same (54 per cent) or increase (24 per cent); only 22 per cent said it would fall.

Investors said they expected to shift money into new areas, such as special situations funds, which invest in distressed debt or turnround opportunities.

Investors plan to increase investments in funds focused on developing countries, such as India, China, central and eastern Europe and Latin America, while cutting exposure to North America, western Europe and Israel.

Copyright The Financial Times Limited 2009