Top buyout, hedge funds cope with flood of cash

NEW YORK - Top performers in the private equity industry are faced with a problem many companies wish they had -- too much money.

With surging investor demand for hedge funds, buyout funds and venture capital firms, some funds are slamming the door to new investors, industry experts said at a New York conference on Wednesday local time.

Some complain the industry has become too crowded to generate the double-digit returns they seek.

"It's pretty dismal out there," said Thane Ritchie, chief executive of Ritchie Capital Management, a US$3 billion ($4.42 billion) hedge and buyout firm near Chicago.

"The opportunities are too few and there is way too much money chasing them."

Institutional investment into "alternative assets," including hedge funds, buyout funds, venture capital and real estate, is well established in the United States. But many Asian and European pension funds are now looking to boost their allocations to the asset class as stock and bond returns lag. That's creating a surge of new cash for the industry, experts said.

"There is a flood of money trying to get into this asset class," said Clinton Harris, founder of Grove Street Advisors, a US$4 billion fund-of-funds that invests in about 90 buyout, venture capital and other funds.

"There is tremendous demand and interest in private equity."

The surge in investor interest is having a two-fold effect on the burgeoning alternative asset industry. On the one hand, many funds can name their terms for investment. But they also are being forced to look farther afield for promising opportunities.

Previously, for instance, hedge funds would typically let investors pull money out on a monthly or quarterly basis. Now many require "lockups" for up to three years or more, Ritchie said.

But a flood of money is prompting hedge and buyout firms to struggle to find profitable investments. Ritchie Capital, for instance, is expanding its energy trading and insurance businesses, often buying companies outright, invading an area dominated by buyout firms.

"There's way more capital than opportunities, and even when there is an opportunity, it doesn't last long," Ritchie said, speaking at a conference sponsored by Strategic Research Institute.

Prospective venture capital investors are facing the same issue -- firms won't take their money, saying they can't profitably invest it in the time-frame of the fund.

Legendary venture capital firms like Sequoia Capital or Kleiner Perkins Caufield & Byers, both of which were early investors in Google Inc and other Silicon Valley high flyers, are virtually inaccessible to most pension funds, experts say.

"Limited partners want to give us money and we are saying we don't want it," said Mark Heesen, president of the National Venture Capital Association, referring to investors in private equity partnerships.

"There are a lot of unhappy LPs out there."

- REUTERS