Diverging Views on PE Prospects

Difficult as it is for hedgies to raise capital, private equity managers may have a tougher time. Then again, big investors’ opinions on private equity – and the amounts they allocate to the asset class – differ widely.

In many portfolios of alternative investments, hedge funds have a 50% or 60% share while private equity is down to 5% to 10%. On the other hand, some investors look forward to lucrative sales of private equity-owned firms as companies sitting on large piles of cash look to expand by buying ready-made businesses. Investors who hold this opinion tend to own a lot of private equity, as much as one-third or more of their alternatives portfolio.

Also, in certain markets, particularly credit and real estate, private equity-type funds with lengthy gestation and lock-ups can take advantage of opportunities that are not available to shorter-term oriented hedge funds.

But many investors want to have the option of reallocating capital against the current high degree of uncertainty, what with China slowing down, parts of Europe in recession and the Federal Reserve indicating that it will taper off its bond purchases. They prefer not to be locked into a fund for seven years or more.

A report from BlackRock suggests the way for having your private equity and the liquidity as well—buy the stock of publicly traded business development companies, getting private equity exposure that can be sold at short notice.

For instance, BlackRock has bought THL Credit Inc., a public company managed by an affiliate of Thomas H. Lee Partners, the Boston private equity manager. THL Credit lends to middle-market firms, a popular though risky strategy.

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