Specialist Charles Boeddinghaus is reflected in one of his screens, at his post on the floor of the New York Stock Exchange, Monday, April 28, 2014.Richard Drew/The Associated Press
Private equity fund managers risk becoming victims of their own success in raising funds – with close to $1-trillion in buying power driving up prices.
That's one of the conclusions from a new report by industry tracking firm Preqin, which finds that the industry has $399-billion of capital it can use to fund purchases. Add some borrowed money to put the leverage in leveraged buyouts and that represents something like $1-trillion.
So small wonder that Preqin found in a survey that fund managers are tripping over one another on deals, putting upward pressure on prices.
"We could argue that the industry has almost become a victim of its own success," Preqin said in its report.
Preqin surveyed more than 150 fund managers around the world and found that two thirds of them said that valuations for purchases are "high," and the main reason is "competition between private equity firms." Now that they have raised all that money, about half of managers said they felt "pressure to deploy capital" was also pushing up prices and creating a risk that firms will "rush into deals and potentially over-pay."
Firms remained optimistic that they can find "proprietary" deals that aren't subject to price-fuelling auctions. But at the same time, finding those deals came up most often in the survey as the biggest challenge.
And even in the proprietary transactions, pricing is higher because sellers have access to more and more data that give them a good idea about the value of what they are putting on the market.