LPs doubtful of buyout funds

Recent heady returns and record fund-raising aside, limited partners in buyout funds are skeptical of the industry and its potential for maintaining success, according to a survey conducted by Probitas Partners, a San Francisco-based placement agency.

Only 2.5% of respondents, culled from funds-of-funds, family offices, pension fund plans and other institutional investors, say that returns for buyout funds from vintage 2007 will exceed returns from 2006 funds.

Most investors expect the IRRs of top-quartile 2007 funds to range between 15% and 25%, regardless of the size of a limited partner’s investment. But investors believe the greatest returns will come from European mid-market buyout funds, with U.S. mid-market funds following not far behind. Megafunds placed third among buyout choices in the survey.

More than half of the respondents said that they are troubled by the size and number of management and transaction fees that GPs assess, and LPs said that they think the fees are destroying the alignment of interest between fund managers and investors. Separately, investors said that they would agree to give GPs a bigger slice of carried interest in exchange for limited fees. Nearly half said GPs should return 100% of transaction fees to investors.

The second most common fear is that the amount of leverage buoying the buyout market is unsustainable. The respondents also are concerned that returns from large funds will be diluted because there is too much money swirling through the market. The survey was conducted in January and released in March. —Jeremy Harrell