Trouble In the Private Equity Business?

There is a Reuters piece pointing out that some private equity firms are quietly struggling with financial backers who are more or less tapped out in terms of commitments to the burgeoning asset class. A combination of a 23% dollar reduction in exits, a doubling in buyouts, and a big increase in the number and size of mega-funds has emptied the coffers at some of the private equity industry's heretofore largest domestic supporters:

So-called buyout firms used to take four to five years to spend their funds, allowing investors to receive returns gained from the sale of assets over that time. These institutional investors, known as limited partners [LPs], had money going out and money coming in. Right now, the money is mainly going out.

Indeed, so many big funds are spending money so fast that its sucking demand from investors. If private equity firms keep buying into companies at a pace that far exceeds their exits, the LP spigot could go from a steady stream to a slow trickle.

... The Oregon State Treasury, a big investor in some of the largest buyout funds, including Kohlberg Kravis Roberts & Co., Texas Pacific Group Ventures Inc. and Apollo Management, tapped out of its 2006 allocation money in September.

"That's the first time that's ever occurred for us," said Jay Fewel, senior equities investment officer at the Oregon State Treasury. He added that he was aware of other institutional investors that used up allocation money as early as May.

Remarkable stuff. Nevertheless, the odds are awfully good that if returns remain intact and traditional supporters disappear there will be oodles of others to take their place, ranging from smaller fry to offshore funds. Either way, it is still interesting watching the first signs of semi-trouble in the PE biz.