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Private Equity: Private equity houses need to find an alternative to club deals

Institutional investors might reduce private equity investments because of the growing number of club deals.

Endowments and pension funds are becoming increasingly concerned about the concentration of their private equity portfolios because of the large number of club deals, say participants in the industry. As a result, private equity general partners (GPs) are being forced to look for alternative means of financing.

Private equity has become an integral part of institutional investors’ allocation to alternative investments. A recent survey of institutions by State Street Corporation revealed that all respondents had an allocation to private equity. In the same survey last year 10% of respondents reported that they did not invest in private equity. More than half of those surveyed this year allocate more than 5% of their entire portfolio to the asset class.

With the success of the asset class over the past five years, more private equity firms are joining the party, and the competition is leading to an increase in club deals, in which several GPs join together to buy out a company. In some cases, large GPs are teaming up with sector specialists or local GPs in order to win a bid but the main reason is clearly to spread the risk, and the cost of the due diligence that needs to be performed.

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