Smaller private equity firms plan to rely more on wealthy investors for new capital even as these rich clients grumble about high fees and low returns and fear they won’t be able to get their money out, according to a survey released this month by accounting firm Rothstein Kass.
Nine out of 10 surveyed said that it would be difficult to raise money this year and more than three-quarters said high net-worth investors and single-family offices are their best prospects.
The industry’s gloom has worsened in the last 12 months as the deepening financial crisis has limited access to new capital and spooked institutional and individual investors into pulling money out of riskier asset classes.
Rothstein surveyed 226 managing partners at middle market private equity firms that control between $50 million and $300 million in assets. The report, the firm’s second annual industry overview, also included responses from 108 investors who had at least $30 million in assets.
“The sales pitch to wealthy individuals is that they are buying into a down market and their returns could be greater in the future,” said Thomas Angell, a member of Rothstein’s executive committee. “It is a psychological phenomenon that investors are reluctant to buy into down markets out of concern that assets may further depreciate.”
Whether wealthy investors will unbutton their wallets in the months ahead, however, is not a sure thing.
Only one-fourth of the investors said they were highly satisfied with their current private equity investments.
Nine out of 10 investors said they worry about being able to exit a fund, a real concern at a time many managers say they are not able to sell their holdings to other buyers.
“People fear being stuck in a down market because of uncertainty surrounding exit strategies and time horizons for repayment,” Angell said.
Wealthy investors are also grumbling that they want managers to waive some high fees. The survey showed that 66% expected to see more downward pressure on fees, up from 22% who expected fees to be under pressure a year ago. —Svea Herbst-Bayliss