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Buyout and Venture Funds Post Double-Digit Returns for 2006

Mercer Investment Consulting
2007-01-25 16:22 1430

Mercer Investment Consulting Says Record Fundraising Activity Poses Potential Problems for New Funds

SINGAPORE, Jan. 25 /Xinhua-PRNewswire/ -- Private equity managers generated strong results over the past year, with both buyout and venture capital funds generating double digit returns, reports Mercer Investment Consulting (Mercer IC) in its January Private Equity newsletter.

Fueled by one of the strongest merger and acquisition markets since 2001, buyout funds performed exceptionally well over the last year, posting returns above 25%, said Mercer IC, adding that these results were led by the performance of mega buyout managers. The venture capital sector posted a respectable return of 15.6%, although overall IPO volume activity was lackluster.

Year-end 2006 fundraising by venture capital and buyout funds is on pace to exceed that of 2005 and post another record year, Mercer IC said. Buyout funds attracted the majority of the capital as robust investment and realization activity were aided by a buoyant stock market, resilient exit markets and an accommodating debt market.

"Funds are deploying capital more rapidly than before, and this may lead to increased price pressure and a frothy market," observed Caroline Aboutar, a senior consultant with Mercer IC, who specializes in private equity. "To an increasing degree, we have seen larger buyout funds in the market well before they have prior fund returns or realizations to demonstrate to investors. These buyout managers argue that they have gained additional capacity, expanding the investment universe through global investing and by investing in larger deals. In addition, it has been attractive for some managers to shift their attention to engineering large financial transactions rather than focusing on time-consuming acquisitions and operational restructuring efforts."

Ms. Aboutar added, "Investors face a dilemma. The rapid deployment of capital and larger fund sizes, combined with increased deal prices and rising interest rates, may pose a risky buyout environment. Yet, if limited partners decide not to invest in mega funds, they may struggle to increase their private equity allocations."

"An interesting trend in the market has been the blurring of the line between private equity and hedge funds, commonly referred to as convergence," noted Michelle Simmons, a research associate with Mercer Investment Consulting. "Both groups are looking to achieve the same goals: boost returns, raise more capital and diversify risk."

"Convergence allows both hedge fund and private equity managers greater choice and flexibility in deploying raised capital," Ms. Simmons added, "but it also creates a more competitive market and it makes reasonably priced investments harder to find. While the potential for exceptional performance exists, there will likely be some growing pains and some cases of disappointment. Potentially, the new funds may experience difficulties in terms of fund structurings, valuations and return realizations as the regulations and protocol for private equity and hedge funds are significantly different."

Mercer IC's Private Equity newsletter may be downloaded by subscribers free of charge at www.mercerIC.com . Members of the press may request a copy from Charles Salmans ( charles.salmans@mercer.com ).

Mercer IC is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management, and investment monitoring process. We have been dedicated to meeting the needs of clients for more than 30 years, and work with the fiduciaries of pension funds, foundations, endowments, and other investors in some 35 countries.

Throughout most of the world, Mercer IC is an autonomous unit within Mercer Human Resource Consulting LLC, a wholly owned subsidiary of Marsh & McLennan Companies, Inc. (MMC). MMC lists its stock (ticker symbol: MMC) on the New York, Chicago, and London stock exchanges. In the US, the investment consulting business is operated through Mercer Investment Consulting, Inc., a wholly owned subsidiary of Mercer Human Resource Consulting, Inc., the US operating unit of Mercer Human Resource Consulting LLC.

Contact:

Charles G. Salmans

Tel: +1-212-345-4512

Email: charles.salmans@mercer.com

Garry Hawker

Tel: +65-6327-3519

Email: garry.hawker@mercer.com

Source: Mercer Investment Consulting
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