Private Equity Firms Have Billions and Nowhere to Spend It - NYTimes.com

This article in this morning's New York Times is interesting from several perspectives.

First, it raises an interesting question regarding the motivation of the managers of the private equity funds.

And, second, it raises the more troubling question of why the managers haven't been able to spend more of the funds allocated to them. Do they think that valuations are not all that attractive?

Finally, here's a key section of the article, especially given the fact that many pension and endowment funds are allocating resources away from the public markets to private equity:

Many in the industry are getting caught in bidding wars. Firms are assigning surprisingly high valuations to companies they are acquiring, even though the lofty prices will in all likelihood reduce profits for their investors. A big drop in returns would be particularly vexing for pension funds, which are counting on private equity, hedge funds and other so-called alternative investments to help them meet their mounting liabilities.

Given the prices being paid for companies, investors’ returns over the life of the fund are likely to drop into the low to mid-teens, said Hugh H. MacArthur, head of global private equity at the consulting firm Bain & Company, which used to be affiliated with Bain Capital, the private equity firm. Returns will be even lower once fees are factored in. Private equity firms typically charge an annual fee of 2 percent and take a 20 percent cut of any profits.

While investing in private equity will probably be more lucrative than investing in public markets, “those are far from the gross returns of the mid- to high teens that we saw a few years ago,” Mr. MacArthur said.

Private Equity Firms Have Billions and Nowhere to Spend It - NYTimes.com