* Private equity funds under pressure from investors
* Terra Firma's Hands puts up over 500 mln euros of own
* Dry powder hit record $1.2 trillion in 2014
By Freya Berry and Arno Schuetze
BERLIN, Feb 25 Private equity funds are sitting
on record levels of cash. And yet delegates at an industry
conference in Berlin are feeling the pressure to generate
adequate returns and offer value for money to investors.
Major players agree that funds, known as General Partners
(GPs), are being forced to address demands from investors
piling record amounts of cash into funds as they seek returns
when interest rates are at rock bottom.
"At the same time we have increasing demand, we have to
realize that we have a real problem in GP delivery," said James
Coulter, co-founder of US fund TPG.
"We are beginning to see a challenge to the basic fund
structures we've become very comfortable with."
Investors are hunting returns. That helped undeployed
capital, or dry powder, hit a record $1.2 trillion in 2014,
according to market research firm Preqin.
Last year alone, funds including Hellman and Friedman,
Permira and Bain Capital raised around $422 billion,
according to Thomson Reuters data.
But the availability of cash brings its own problems.
Once investors have committed capital to a fund, they are
generally charged fees even though the money has not yet been
invested, meaning the pressure is on to spend.
That has already forced up prices as multiple funds chase a
limited number of acquisitions. Global average exit multiples
hit 12 times core earnings (EBITDA) last year -- the highest
since 2008, according to Thomson Reuters data.
"Prices are as high as they ever were," said Ralf Huep,
General Manager at Advent. "There is ample capital to be
invested and a lack of target companies. The dry powder is too
much for what (the industry) gets going every year."
"BACK TO THE FUTURE"
Investors, or Limited Partners (LPs), are already asking for
change, managers said, for example by demanding that fees be
paid only on capital deployed. And pension fund giant CalPERS
said in January that it would slash its number of private equity
managers by over two-thirds in a cost-cutting drive.
Sovereign wealth funds (SWFs) sitting on enormous amounts of
cash are also wielding increasing power. Such funds accounted
for 14 percent of capital invested in private equity in January
2015, up from 6 percent five years previously, said David
Rubenstein, co-founder and co-CEO of Carlyle.
"The exponential growth of SWFs will put them in a stronger
position to seek changes from GPs," Rubenstein said.
Delegates said funds needed to be creative and suggested a
number of answers to the situation, including buyout houses
being more flexible with their terms, or co-investing, where LPs
work alongside a fund to invest directly into an asset.
"The question is not whether the money will be invested, but
if it will be invested sensibly," said Wendelin Thoenes,
Investment Manager at Allianz Capital Partners. "Therefore it is
important that there is proper alignment of interest between GPs
Guy Hands, chairman and chief investment officer of UK fund
Terra Firma, said that GPs once more putting their own capital
into funds as they did at the dawn of private equity could help.
He added that the firm was putting 1 billion euros ($1.14
billion) of its own cash into investments, of which more than
half was his own money, to applause in the room.
"What the small organisations were doing in the 1970s, 80s -
I think that's the way to go," Hands said. "Private equity needs
to go back to the future."
($1 = 0.8810 Euros)
(Reporting By Freya Berry; Editing by Keith Weir)