There are tough times ahead for the domestic private equity (PE) market, according to Principle Advisory Services managing director Lachlan Douglas.
Douglas has predicted a big shake-out in the sector and significant changes to the manager landscape in Australia.
"However, this may take a long time to play out because many PE managers have embedded fee streams in their business because they have committed capital. Even when they lose investor support they will continue to draw revenue and so their business will continue to operate," he said.
Despite this, Douglas said the picture for private equity was "very bleak".
"The most recent capital-raising cycle was driven by interest in Asia and as a result a lot of international funds were invested into the domestic market," he said.
"In the next fund-raising cycle we will see a lot of that directed at Asia more generally, rather than just Australia."
The way that Australian institutional investors are investing will also cause changes, Douglas said.
"Institutional investors are globalising their private equity portfolios," he said.
"Before, there was more of a home country bias in private equity portfolios, but now there is less domestic capital."
Previously, institutional investors were gravitating towards larger, more established managers, but now they are showing an interest in specialty or mid-market managers, Douglas said.
"There are a lot of managers that need to raise capital this year and I expect they will be very busy. But it could also be very disappointing for people at this stage as everything is pointing to a lower availability of capital," he said.
Principle Advisory Services is a placement agent that was established in 2001 to help Australian superannuation funds with domestic private equity and infrastructure investments.
