Many private equity firms grew too large and were overpaid at the peak of the economic boom, and that’s going to lead to structural changes in the industry. So says private equity manager Guy Hands in a recent interview with the New York Times.
Hands is well known for his own unfortunate $4.73 billion purchase of record company EMI in March of 2007, a move that will likely cost his investors and his PE firm, Terra Firma, millions, if not billions in losses. Now he is desperately trying to keep the business afloat while delivering vast interest payments to the banks that financed the transaction, most notably, Citigroup.
Hands comments that many funds grew so large during the peak that their 2 percent management fee became just as important as the 20 percent cut of performance. Success had less to do with performance than simply bulking up on assets. And managers did not use the excess fees to invest in resources and grow the skill base of their funds.
Now he sees the industry beginning to contract, as firms struggle to raise enough new money (and corresponding fees) to support the hundreds of people they already employ. It is similar to what happened in the venture capital industry in the late 1990s, when investors realized too much money was chasing too few deals.
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