A shakeout?

Emanuel Eftimiu
17 December 2010

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Remember a study titled тGet ready for the private equity shakeoutт published two years ago? Not really? To refresh your memory, it was a white paper published jointly by IESE Business School and The Boston Consulting Group and made headlines by claiming that 40% percent of the world's largest private equity firms could go out of business within the next three years.

Needless to say that two years down the line and despite a severe economic downturn, the report's claims look a little far-fetched.

And while it is not necessarily the 40% figure that seems unrealistic, the time limit set by the study does. Industry observers often seem to overlook the fact that longevity is engraved in the DNA of this asset class, with the 10-year fund structures being a fitting reminder. Therefore any "shakeout" is not going to have an imminent effect on the industry but will rather be a drawn out process, with even those buyout houses not able to raise new generation funds typically managing out their investments for several more years in order to return any value to investors.

That said, the private equity landscape is certainly going to change and not only due to the impact of regulatory changes. Some houses will indeed fall by the wayside as returns on their vehicles are found wanting by investors. But while a number of buyout shops may disappear over the next fund cycle, one should also expect several new names in the industry as some partners with strong track records on individual investments decide to go it alone. Maybe the term that best describes current developments in the industry is instead "filtration", as at the end of this process we are likely to have a more condensed or ‘purified' industry of highly successful private equity houses. Then again "Get ready for the private equity filtration" wouldn't have had the same ring to it.