Over 50% have fund management teams that operate collateralised debt obligations (CDOs). Only a minority of these largest fund managers are focused purely on private equity investment. Noticeably this focus on pure private equity is seen to a much greater extent in UK-based funds than their US counterparts. This may reflect the relative maturity of the UK versus the US private equity market.
51 Private Equity Demystified: an explanatory guide Figure 2.6: Forms of diversification undertaken by world’s largest private equity managers Source: Gilligan and Wright. We suggest that an examination of the hedge fund industry may similarly find that the largest hedge funds have started to become active in the private equity market whether as equity investors or as providers of debt and mezzanine to support buy-outs. It is clear that the boundaries of the various alternative investors are blurring. One possibility is that private equity will respond to this competitive threat by taking on greater risks either in pricing and structuring investments or by changing the underlying long-term commitment model and introducing leverage into the fund structures. If such a trend were to emerge, our conclusion regarding the absence of systematic risk in private equity would need to be reviewed. 2.1.15 Can a private equity fund or a private equity manager fail? As explained in section 1, private equity funds are not usually structured using third-party debt and therefore do not generally carry a significant bankruptcy risk. As noted earlier, a private equity fund may lose all the investors’ capital, but, unless they create liabilities by mismanagement (eg, guaranteeing obligations of investee companies), they are unlikely to become formally insolvent. However, while the absolute risk of bankruptcy is remote, it is clear that some funds perform badly and investors do lose some or all of their committed capital. 0 20 40 60 80 100 % 48% 44% 40% 52% 28% Property/ infrastructure Quoted investments Hedge funds CDOs VC/early stage
52 Private Equity Demystified: an explanatory guide An unusual circumstance arose in the case of UK investor Candover. Established in the 1980s, Candover grew to become one of the world’s large private equity funds. It had a slightly unusual structure that led to its demise. Its general partner (also confusingly named Candover) was itself a quoted company on the London Stock Exchange. In the financial crisis it became clear that the quoted general partner (which had debt within it) could not be certain of being able to finance its commitments to the latest Candover fund. In consequence the other investing LPs were able to renegotiate a cancellation of the fund commitments, leaving Candover without a new fund to invest from. This arose because it was the general partner which could not commit to the fund rather than any of the limited partners.
- Fall '18
- Private Equity Demystified