Beyond the Big Bucks of the Behemoth Megafunds

There's more to the world of private equity than the giants -- the Bains, Carlyles, KKRs of the world. True, more than 50% of all funds raised in 2006 were raised by the top 20 firms. But, there is a vibrant layer of firms doing fundraising below that top 20.

I raise the point because there are some concerns that private equity may have difficulty raising money in '07. There has been a drop in the number of exits, as the value of private-equity backed deals has skyrocketed. That means smaller returns to investors. After all, why should an investor write another check, when he hasn't gotten his money back from the first investment?

Also, many megafunds were active in fundraising over the past couple of years, and history shows that after big fundraising years, funds tend to retreat. But maybe not in '07. Carlyle and Warburg, for instance, are each expected to raise $10b funds in '07.

So will the well go dry?

Not when there is endless water pumped into that well from pensions and endowments. These investors are upping their allocations to private equity (and other alternatives like hedge funds) simply because they have to. State budget cuts and underfunded pension plans are powerful reasons.

And then back to the original point: there are many firms out there beyond the giants who will also be successfully fundraising next year. It may not be another record year. But private equity will continue to be a powerful force.

Questions? Comments?