While buyout funds remain popular among private equity firms in the U.S. and European fund-raising market, distressed firms are also driving fund-raising totals up. The fact that both these sectors were so strong in the first half of 2007can be taken as evidence that general and limited partners alike have been anticipating that a turn in the credit cycle is approaching. And that, in combination with an increasingly difficult regulatory and interest rate environment, points to the fact that the attention is beginning to shift away from the mega firms. With these distressed firms garnering so much attention, it is clear that the mega shops will need to have their houses in order when they hit the fund-raising trail in the second half. As a result, more U.S. buyout firms are diversifying into different product lines.
"Private equity firms have come to the realization that they are institutional money managers," said Bruce Ettelson, a fund formation lawyer at Kirkland & Ellis LLP. "Once investors trust them with management, these firms can branch out into other product lines" - infrastructure, for example. Firms that are interested in liquidity - whether by going public or by selling a stake in their management company to a large limited partner - have realized they need diversification to smooth the lumpiness of their management fees and carried interest. At the same time, limited partners are seeking to cut down their number of GP relationships, yet simultaneously to remain diversified. "As the size of portfolios increases, having a smaller number of managers is attractive to some investors," Ettelson said. "The number of private equity clients that have multiple product lines has increased dramatically from just a few years ago."
This article appeared in its entirety in the July 16, 2007 edition of Private Equity Analyst.