Private equity fundraising slumps 61%

Private Equity firms, which own businesses as diverse as Orangina, New Look and the Hilton hotels, have just seen their fundraising suffer its worst year since 2004, according to an industry report. A total of 482 private equity funds worldwide raised $246bn (£154bn) in 2009, down 61% from the year before, said Preqin, an industry research firm. The last quarter of last year saw the lowest point, with only $35bn raised by 75 funds, the worst performance since 2003. "Fundraising conditions have been extremely challenging in 2009, with a significant number of investors holding back from making new investments," Preqin said. Just over half of investors planned to make further commitments to a private equity fund in the first half of this year, while 16% planned to wait until the second half, the report said. Investors, including pension funds, are not committing more money to these funds as they are seeing little returns from the private equity firms themselves. The typical private equity model, where firms sell off the companies they buy after a few years of ownership and make big payouts to their investors, has been stalled by the recession. Low asset prices, lack of bank funding and the high rates charged to borrow money have delayed many initiatives. US firm Blackstone, for example, has postponed the stock market listing of Tragus, owner of the Cafe Rouge and Strada restaurant chains. "The money is not going back to investors, so they don't have much capital to re-invest," said Tim Friedman, Preqin's head of communications. The credit crunch has also reduced the risk appetite of many investors, who were now more willing to invest in funds closer to home, Friedman said. "Investors are a lot more careful, so US funds will focus more in the US, while the Europeans prefer Europe," he said. "We are seeing investors focusing more on understanding the state of their existing portfolios and spending considerably more time when considering new vehicles. Negotiating terms and conditions has become more of a key concern." More than half of the private equity funds were raised in the US last year, whilst Europe accounted for $74bn of the $246bn raised, the report said. However, the largest fund to close last year was CVC European Equity Partners V, which raised €10.75bn (£ 9.66bn) to invest in European mid-market companies. Private equity firms also need much more time to raise money: about 18 months at present, compared with barely one year at the peak of the market in 2007. "Although the majority of investors will be active in 2010, it will be at a lesser rate than in recent years," the study said. Private equity firms enjoyed a steady flow of funds between 2004 and 2007, as cheap and ample credit increased investors' commitments in the asset class. Such firms, however, have been criticised for loading up their portfolio companies with debt, sometimes used to pay the private equity partners hefty bonuses. The industry is now also facing heavier regulation from the European Union, which is in the process of finalising the alternative investment management directive, aimed at imposing tougher controls on private equity firms and hedge funds.