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Study: Firms will disappear, merge amid ‘shake-out’

Bridgepoint’s acquisition of Hermes’ direct funds and CapDyn’s assumption of HRJ’s assets are examples of a trend mid-market GPs expect to continue.

The number of private equity houses in the market is expected to fall significantly during the next 24 months, according to a poll of mid-market private equity executives.

The study, commissioned by accountancy firm Smith & Williamson, surveyed 136 executives from the UK mid-market and found two-thirds of respondents anticipated a reduction in the number of private equity firms.

“Recent poor performance has meant many private equity houses are being squeezed:  They cannot raise new equity funds and cannot raise bank finance either, since the banks are increasingly focusing on investors’ track records before committing finance for deals,” said Brian Livingston, head of private equity at Smith & Williamson, in a statement.

“As a result, many firms are effectively unable to make investments and may have little choice but to merge or shut down,” he added.

As yet there have been few instances in which private equity platforms have merged.

In April, Switzerland-headquartered private equity firm Capital Dynamics absorbed $2.2 billion in assets and certain “key” professionals from struggling US fund of funds platform HRJ Capital. HRJ had run into trouble with an aggressive over-commitment strategy that had left it potentially unable to make capital calls as well as a $70 million loan from the Silicon Valley Bank.

A month earlier European mid-market firm Bridgepoint took control of two active direct investment funds and the related 10-person investment team from Hermes Private Equity. After a strategic review, Hermes had decided to focus entirely on its core fund of funds platform and spin-off their direct assets.

“We are going to see huge change and consolidation and it’s going to work at a pace that maybe we can’t even predict at the moment,” one London-based GP told sister publication Private Equity International in May, “There are a number out there who are effectively dead beyond their existing funds.”