Private equity fund managers are splitting into two distinct groups – a cadre of huge firms that do everything in alternatives and a teeming collection of specialists and boutiques – thanks to competitive pressures and shifting limited partner demands.
While this binary outcome may benefit managers in the long run, the specialist players will also need to be prepared for increased levels of due diligence from investors, market watchers say. The trend of divergent product sets has been developing for the past few years and is expected to build steam. That’s one conclusion of a recent Ernst & Young report on a survey it conducted for the Private Equity Growth Capital Council, which found strong expectations of a continued “bar-belling” of the private equity industry. “Investment strategies of larger and smaller firms will continue to diverge,” the report says. That means larger managers will continue to broaden their product offerings, with most “planning significantly more involvement in real estate, hedge funds, fund of funds, or retail and high-net-worth-focused funds.”
The trend toward product divergence may also mean mid-sized private equity managers may have a serious decision to make: go big, go small – or go home.
“There are some very successful mid-sized firms that we would expect will continue to thrive in the future, because they have good track records,” EY’s Rogers says. “But what we’re seeing more and more is that mid-sized funds are either migrating up or migrating down. It is getting tougher to navigate that center ground.” Not every firm may survive, but the bifurcation ultimately can be a good thing for managers and investors alike, Bailey says. “It offers investors more choice,” she says. “And it lets firms play to their own strengths.”
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