Private equity sees shortage of investment deals

But private equity funds are facing huge challenges, the main one being a scarcity of good investment opportunities. “Some 4,500 funds with an estimated total of $1 trillion in uncommitted assets are chasing a limited supply of opportunities,” according to SEI.

Another issue for private equity funds is that their oversupply of assets is driving up the valuations of potential investment deals at a time when rising equity markets are producing the same effect. More than six out of 10 respondents say the industry’s surplus of money is causing more competitive bidding. Forty-five percent of survey participants say this situation is raising the price expectations of sellers. And nearly half of respondents say this is making new fundraising more difficult.

Additionally, the private equity industry is grappling with mounting performance pressure. This is because investors and consultants are increasingly viewing private equity investments, rather than portfolio diversification, as a source of higher returns. They also rank performance as the second most important factor when selecting a fund.

But many funds are fettered by unprofitable investments and the fierce competition for acquisitions. The study notes that some private equity fund managers will be unable to produce positive returns because, for example, they haven’t managed to invest all of the capital raised.

The SEI global study surveyed 654 institutional investors, fund managers and consultants in the private equity industry.

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