Fundraising will doom some private equity funds

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I noted recently that according to data from Preqin, deal flow in the private equity business as well as exits have been strong recently.

In some ways, 2012 was a banner year. The proposed Dell leveraged buyout has generated some good energy, making clear that in the right circumstances massive deals are still possible. But I also noted that a new era was settling in, with fundraising as a big issue.

Bloomberg weighs in with a look at the dearth of fresh funds that looms large for the entire industry, especially the smaller companies. The private equity industry "is bracing for a shakeout that's been brewing since the collapse of credit markets choked off a record leveraged-buyout binge. Firms that attracted an unprecedented $702 billion from investors from 2006 to 2008 must replenish their coffers for future deals and avoid a reduction in fee income when the investment periods on those older funds run out, typically after five years."

The harsh conclusion is that, the "combination of underperformance and funding needs has set the stage for a purge as investors pull the plug on the weakest firms. Only the scope of a shake-out is a matter of debate."

The bottom line is that up to 708 firms face such deadlines through 2015, according to Preqin.

What we're seeing is a flight to quality. The premiere buyout companies are still raising money for funds, albeit in smaller amounts than in previous years. The problem is that the big limited partners only want to spread around so much, and inevitably that reduced inflow will hit some of the smaller funds very hard.

By one estimate, up to one-quarter of all funds "will see their funding pulled." That said, the smaller funds will either follow their larger brethren and diversify their offerings, or they will have to come up with the mythic "next big thing," which proves elusive more often than not.

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Private equity deal flow soars, exits strong