Private Equity Shakeout: 'There Will Be Some Carnage'

Private equity firms are bankrolling the biggest deals announced this year: Silver Lake helped finance the $24.4 billion buyout of Dell, and 3G Capital teamed up with Warren Buffett’s Berkshire Hathaway on the $23 billion takeover of H.J. Heinz. Yet the dealmaking revival comes too late to resuscitate many buyout shops that have losing records. “There will be some carnage,” says Jay Fewel, a senior investment officer for the $73.5 billion Oregon state pension fund, which has been investing in private equity for more than 30 years. “A lot of folks raised money in the mid-2000s, when it was pretty easy. Now there are probably too many funds out there.”

Private equity firms pool money from investors, including pension plans and endowments, to buy companies, then sell them and return the money with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of the profit from investments. A mid-decade boom in dealmaking helped buyout firms post stellar returns and attract fresh money: From 2006 to 2008 they raised an unprecedented $702 billion. There are 4,500 buyout shops with $3 trillion in assets.