The future of private equity market

Several market watchers have asserted that the pace of growth of private equity deals has impressed upon investors the notion that stocks are reasonably priced. Consequently, they are also inclined to believe that a gradual decrease in private equity deals will signal over-valuation again. Although we don’t dismiss such a notion completely, we feel that the idea is completely devoid of some very important macro factors like rise in interest rates, efficient allocation of private equity funds and the success ratios of historical buyouts. Analysts have unsuccessfully tried on several occasions to correlate overall performance with the pace and size of private equity deals.

While the majority of the institutional investors are embracing the private-equity buyouts and pumping capital into mega-buyout funds, a plethora of skeptics have emerged that are preaching another stock market bubble. The question of whether a bubble is possible, is best answered by Warren Buffet in the May 2007 Berkshire shareholder meeting; according to Buffet, “the private-equity phenomenon really doesn’t lend itself to the bubble-bursting analogy. Because the money is tied up for long periods of time and there’s no easy scorecard with which to check in on the value of the acquisitions, he said, it could take quite a while before investors become disillusioned with the private-equity industry”.

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