Panel: 2012 to bring shakeout and 'zombies'

One of the primary challenges to the private equity industry in 2012 will be a general partner shakeout and the rise of so-called “zombie funds”, when underperforming GPs string out the life of existing funds to continue raking in management fees, according to a panel of GPs who spoke at an industry conference in New York Wednesday.

“The problem with private equity won’t be a high mortality rate necessarily, just a high rate of morbidity, because it takes so long to kill these firms,” head of NB Alternatives Anthony Tutrone said. “There are going to be a lot of zombies out there.”

Tutrone was speaking at a panel discussion sponsored by law firm Debevoise & Plimpton and Privcap, a recently launched private capital new media company.

While firms may not close their doors in 2012, an increase in zombie funds could be the first step toward the death of certain private equity groups, according to managing principal at The Jordan Company, Adam Max.

“I don’t think firms ever officially close. They seem to be able to stay open forever because they’ve got a management fee on an old fund and they can pay the rent,” he said. “But the reality is that we’re going to see a shakeout, which is, frankly, something the industry probably needs.”

One of the benefits of the increasingly challenging environment, Tutrone said, will be opportunities in the distressed market.

“There are going to be all kinds of opportunities that are more temporal around distressed debt,” he said. “You can either do it directly or pick people who really know how to do it, but this is not a terrible time.”

On the fundraising front, there will be a continuation of the theme of the “have’s” and “have-not’s”, Tutrone added. “Really good mid-market players actually have no problem raising money. They’ll be oversubscribed,” he said. “If you’re not one of those top tier guys, it’s going to be very tough.”

New pools of capital into the private equity space could open additional doors for GPs in 2012, according to Russell Steenberg, managing director at BlackRock Private Equity Partners.

“There are potentially down the road a couple of sovereign wealth fund’s that are emerging that do not do private equity right now and when they start to do private equity it will move the market in a big way,” he said. “Norgis Bank is one of them. It is a huge pool of capital. It does not do any private equity. It will get around to doing private equity, and when it does…everyone will be going through Oslo.”

Additional capital sources may come from pensions increasing their allocations to alternatives and private equity, Tutrone added.

“I don’t think they have a choice,” he said. “They’re not going to be able to meet their liabilities.”

George Siguler, founding partner of Siguler Guff, predicted more fundamental changes to the entire industry in 2012 and beyond.

“I think we’re going to see challenges to the model, the cost of the model, the fee structures of the model and the length of time that primary investment periods run,” he said. “Lots of things are going to be challenged.”