Pressure is building on Australia's private equity sector.

The initial public offerings market is almost shut for private equity firms looking to sell industrial companies. Weakening business conditions could reduce the appetite of cashed-up corporates to buy assets in trade sales, and the big question is how institutional investors will allocate new funds to private equity this year.

More private equity deals in the past 12 months are an improvement on conditions in 2008 and 2009. But the industry is far from buzzing.

"The market tends to focus on big-ticket private equity deals and there have been more of those this year," Australian Private Equity and Venture Capital Association (AVCAL) chief executive Katherine Woodthorpe said.

"However, the bulk of private equity activity goes under the radar. My sense is we are returning to a more normal market for this sector, although a plateauing in the economy could see private equity activity plateau."

Woodthorpe said Australian super funds were generally taking a cautious approach to commiting new money to private equity funds and there was more pressure on private equity firms to lower fees.

"International funds are showing more interest in fund raisings from better-performed private equity funds, notwithstanding our high dollar and concerns over the tax regime for private equity investors," she said.

AVCAL data provided to Investor Weekly showed at least 20 significant private equity transactions in the past 12 months (see list below).

A growing number of deals have been between private equity firms. For example, Quadrant Private Equity sold Quick Service Restaurant Holdings - owner of the Red Rooster, Oporto and Chicken Treat chains - to Archer Capital for $450 million in June. Archer also bought private hospital operator Healthcare Australia from Champ Private Equity for $240 million in June.

The increase in secondary private equity sales is partly in response to weak IPO markets and lacklustre corporate demand for some assets. How this affects investment performance for private equity funds is yet to be seen.

Private equity buyers are unlikely to pay inflated prices for assets, such as Myer Holdings, which fund managers and retail investors snapped up in 2009. And private equity sellers are well known for extracting as much value as possible from an asset before exiting.

Australia's largest private equity and venture capital funds returned 7.3 per cent net of fees over one year to 31 December 2010, compared with a 1.9 per cent gain in the S&P/ASX 300 Index, the Cambridge Associates LLC Private Equity and Venture Capital Index showed.

Over three years, the index returned 5.6 per cent more than ASX 300 companies; over five years the performance gap narrowed to 1.3 per cent; and over 10 years, private equity has slightly underperformed.

Stronger short-term outperformance by private equity is timely. A weakening global economy and higher regulatory risks for private equity funds could dampen fundraising and force some funds to exit assets sooner than they would like.

There has been more pressure from institutional funds, which invest in private equity to achieve allocations in alternative asset classes, to lower fees. Research by Preqin and AVCAL in April found 34 per cent of institutional investors surveyed intended to commit to private equity in 2011, with 34 per cent unlikely to commit and 32 per cent unsure about their next commitment.

This cautious approach from super funds will result in more competition among private equity firms to raise funds, and potentially more rationalisation in the sector, given there are arguably too many private equity firms.

Recent private equity exits:

(Portfolio company name followed by private equity firm name)

• Study Group - Champ Private Equity
• Loscam - Affinity Equity Partners Australia
• Dun & Bradstreet - Lazard Carnegie Wylie (LCW) Private Equity
• Hudson Building Supplies - Propel Investments
• Marstel Holdings - Propel Investments
• Bledisloe Holdings - Propel Investments
• Landis + Gyr - Propel Investments
• National Hearing Care - Crescent Capital Partners
• Healthecare Australia - Champ Private Equity
• Lomb Scientific - Anacacia Capital
• Easternwell Group - Ironbridge Capital
• Securepay Holdings - Advent Private Capital
• Tegel Foods - Pacific Equity Partners
• Seven Media Group - KKR Australia
• The Cellarmasters Group - Archer Capital
• TSMarine - Champ Ventures
• Ausco Modular (Waco International) - Unitas Capital
• Healthcare Australia - Champ Ventures
• Quick Service Restaurants Holdings - Quadrant Private Equity
• Sizzler (part of Collins Food Group) - Pacific Equity Partners

Source: AVCAL