According to TheDeal.com, Private Equity Intelligence is arguing that "the conditions for the long-term growth of the buyout industry are still very much in place." PEI is justifying this point of view, it seems, with the amount of capital still being raised by large private equity firms, despite the recent string of unfavorable news for borrowers and potential borrowers.PEI goes on to argue that private equity funds are going to continue taking in huge sums of money as institutions raise their "target allocations" towards private equity funds -- a seemingly rational assumption.
But there are several problems with this thesis. Most importantly, I'd bet that the target allocations for private equity funds are going to decrease if the funds' returns suffer due to a more difficult borrowing environment. I'd also argue that recent fundraising success by private equity funds doesn't represent the health of the credit market -- I'd bet that many investors are simply chasing incredible past performance at these funds without recognizing that it was much cheaper to finance these transactions just one quarter ago.
While there's plenty of talent in the private equity space, I tend to believe that the difficult credit situation is going to hurt private equity performance over the next few years.
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