Mercer Investment Consulting is predicting another private equity bubble in the US and has warned clients that because of limited capacity of top-tier managers, many new investors may be disappointed with future returns.

And the consultant’s European arm says that private equity managers in the buyout sector have raised large sums of money and face similar issues to those of the US. Caroline Aboutar, a Chicago-based senior consultant with Mercer specialising in private equity, says that the forthcoming US bubble will not be as severe as the one in the late 1990s. However, she says that due diligence is being rushed because of the flood of capital and limited availability of capacity. “Consequently, the effort to rapidly deploy as much capital as possible, coupled with pressure on deal valuations, may decrease return prospects,” she says. Mercer’s cautionary note is contained in its latest private equity newsletter to international clients. In this environment, investors in private equity must evaluate the talent and track record of private equity managers and take extra care to ensure that due diligence standards are met, the newsletter says. Private equity markets generated strong returns in 2005, dominated by the small-to-medium buyout market sector. Venture capital returns were buoyed by stronger IPO and M&A markets but continue to be plagued by the technology bust of 2000, which continues to be a drag on performance. Encouraged by robust investment activity and the realisation of profits from investment ventures, the first three quarters of 2005 saw an upsurge in private equity fundraising compared to the same period in 2004. This wave of new capital arises as limited partners boost alternatives targets or institute new allocations to private equity, a trend of the last few years that accelerated in 2005 and appears to be continuing in 2006. Aboutar says that, in the US, less time is being spent on due diligence because fund-raising schedules are being compressed. In Europe, the private equity market in Europe is similarly robust over the past year but investors face similar issues to those in the US. According to Sanjay Mistry, a London-based senior consultant with Mercer specialising in private equity: “With many changes taking place in the European private equity market, managers have lately attracted significant capital as many limited partner allocations are now equally split between the US and European buyout markets.”

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