Investors warn private equity over cash calls

LONDON (Reuters) - Private equity firms hoping to do deals in 2009 will face intense pressure from cash-strapped investors, frustrating efforts to access their fabled $1 trillion pledged cash pile.

Limited partners (LPs) -- powerful private equity investors such as pension funds -- are telling buyout houses they will not be able to meet pledges when private equity firms tap their reserves for deals.

"I couldn't stress enough how severely impacted the LP market place has been," David Giampaolo, chief executive of private equity firm Pi Capital, told the Reuters Hedge Funds and Private Equity Summit in London.

European buyout firm Permira PERM.UL last year proposed a 60 percent cap on commitments to its fourth buyout fund for investors struggling to meet their planned allocations.

The proposal was taken up by Permira's largest investor, SVG (SVI.L) capital, and 17 other of its 180 investors, demonstrating they are anxious to get off the hook.

U.S. firm TPG TPG.UL has also offered investors the opportunity to reduce their pledges by 10 percent and promised not to call more than 30 percent of an investor's total commitment in 2009 without permission.

"LPs are not very happy to put more money to work right now," said Giampaolo.

"So if you are going to send out a drawdown notice to your LPs because you are funding another deal, it better be one extraordinary deal," said Giampaolo.

There is unlikely to be a wave of defaults on commitments as private equity firms will be sensible enough not to call on that cash and find themselves in the uncomfortable position of having to sue their investors, he said.

DEFAULT LINE

In a rare cash call in a dormant deals market, buyout house BC Partners BCPRT.UL late last year drew down over 10 percent of its near 6 billion euro ($8.15 billion) fund in order to buy German electrical goods supplier SGB.

The demand was met by investors on the due date without any problems, Managing Partner Andrew Newington said.

"If the entire private equity industry were to say, I'm drawing down 100 percent of available committed capital tomorrow, you would have a default rate of 20 to 25 percent," Newington said at the summit.

"I'm guessing, but it would be a reasonably high default rate because people don't have the cash today," Newington said.

Buyout activity will remain sluggish in 2009, Newington said, with commitments likely to be drawn down slowly over the course of the next 24 to 36 months.

Investor unwillingness to put money into deals is being mirrored in the worsening fundraising climate.

"The amount of new funds that will be raised over the next two years will probably be at a 10-year low -- it will be an astronomical low," said Giampaolo.

The sentiment was echoed by Joshua Steiner, co-president of U.S. private equity firm Quadrangle.

"What are investors telling us?" said Steiner. "They're telling us that they like our strategy, that they like our team -- and that this is not the right moment to be raising a fund."

"That's exactly what we're going to do," Steiner added.

($1=.7366 Euro)

(Editing by Simon Jessop)