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Tuesday, June 23, 2009

Private equity looks to recruit private investors

Private equity looks to recruit private investors

Wed Jun 10, 2009 3:31pm EDT

*PE managers see tougher capital raising conditions

*Private investors jittery about exiting funds

By Svea Herbst-Bayliss

BOSTON, June 10 (Reuters) - Smaller private equity firms plan to rely more on wealthy investors for new capital even as these rich clients grumble about high fees, low returns and fear they won't be able to get their money out.

Nine out of 10 said it would be difficult to raise money this year and more than three-quarters said high-net-worth investors and single-family offices are their best prospects, a survey by accounting and audit firm Rothstein Kass showed.

The industry's gloom has worsened in the last 12 months as the deepening financial crisis limited access to new capital and spooked institutional and individual investors into pulling money out of riskier asset classes.

Rothstein surveyed 226 managing partners at middle market private equity firms that control between $50 million and $300 million in assets. The report, the firm's second annual industry overview, also included responses from 108 investors who had at least $30 million in assets.

Rothstein Kass is set to release the findings on Thursday.

Private equity firms jointly oversee an estimated $1 trillion in assets and like hedge funds their returns sagged about 20 percent last year when the Standard & Poor's 500 index lost about 36 percent, data from Thomson Reuters show.

"The sales pitch to wealthy individuals is that they are buying into a down market and their returns could be greater in the future," said Thomas Angell, a member of Rothstein's Executive Committee and head of its Commercial Services Group and Private Equity practice. "It is a psychological phenomenon that investors are reluctant to buy into down markets out of concern that assets may further depreciate."

Whether wealthy investors will unbutton their wallets in the months ahead however is not a sure thing.

The survey found that nearly three quarters of the respondents already have money with private equity funds that take stakes in biotech firms, retailers, manufacturers and many other types of companies.

But only a quarter of the investors said they were highly satisfied with their current private equity investments, worried about managers' abilities to find suitable opportunities.

Nine out of 10 investors said they worry about being able to exit a fund, a real concern at a time many managers say they are not able to sell their holdings to other buyers.

"People fear being stuck in a down market because of uncertainty surrounding exit strategies and time horizons for repayment," Angell said.

Considering that many managers cannot do deals right now, wealthy investors are also grumbling that they want managers to waive some high fees. The survey showed that 66 percent expected to see more downward pressure on fees, up from 22 percent who expected fees to be under pressure a year ago.

Private equity funds expect to face tighter regulatory controls in the months ahead after lawmakers and regulators said they want to have a better idea about what these firms are doing and whether their bets might pose dangers for the entire financial system. (Reporting by Svea Herbst-Bayliss, editing by Leslie Gevirtz)

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