Bottom line: institutions have over-committed to private equity funds and now the chickens are coming home to roost. Staying with the chicken theme, it seems all of those celebrations for closing those billion dollar funds were somewhat chicken before the egg. OK, no more chicken clichés, but it is a little worrying for private equity firms, mine included. I was dismissing this latest news as a big fund phenomenon, but then I hear WaMu defaulted on a $30,000 capital call.
The implication of this is not as serious as the media are making out, at least not for recent vintage funds and not as long as the defaults are limited to a small portion of committed capital call. In practice, it would mean calling extra cash from other investors and maybe scaling down the fund and reducing future investments. It doesn’t look good making subsequent calls due to defaulting investors, but it’s certainly not the end of the world unless there’s a dire need. What really concerns teams is what they’re always concerned about… the carry. I’ve written about the 2/20 rule and the significance of carry before.
More worrying than all of this though, are reports that limited partners are wearing the pants and demanding that general partners don’t make capital calls until otherwise advised. According to the Carried Interest blog, some limited partners are threatening not to invest in future funds if calls are made without their approval. This is going to be a real saving face battle as private equity firms and listed partners fight for power. Unfortunately, for private equity funds, it’s a buyers’ market and listed partners, more than ever, already have the power.