Brian Connors: Warning Flags Rising for Private Equity Firms – DBusiness
Brian Connors was published in DBusiness‘s article titled “Warning Flags Rising for Private Equity Firms.”
Private Equity (PE) firms and their limited partner investors will be facing significant headwinds in the coming years due to high company valuations, record levels of dry power (cash reserves) to invest, and more exit transactions akin to rearranging deck chairs by selling holdings to other PE funds rather than creating IPOs or arranging sales to strategic acquirers.
The good news: investment money has never been easier to obtain from private and public pension funds, college endowments, foundations, high net family offices, and individuals seeking higher yields. Similar to the public equity markets, the low interest rate environment is contributing to this increased appetite for PE investment despite the risks.
The bad news is this brings added pressure for PE firms to find and execute successful investing strategies. This environment does not bode well for the current or recent vintage funds. More than ever, PE shops are getting into earlier stage tech companies and taking more risk that used to be only funded through venture capital. When PEs competitively bid and win on a highly valued company, they have to fund much more through equity, thus depressing the opportunity for higher leveraged returns they have experienced in the past.