Private equity markets are overheated from cheap finance and the best deals are only coming from small niche investments, according to Siguler Guff.

George Siguler, the founder of the private equity manager which has $10 billion in funds under management, cites Preqin research that shows managers worldwide have $3.8 trillion invested in the asset class, but a further $1.2 trillion in ‘dry powder’ or uninvested money.

“Pretty much everything looks expensive,” said Siguler who was speaking at the Conexus Financial Private Assets conference.

He blamed the growth in cheap finance for increasing leverage in the market. “The banks are kind of making the same mistakes,” he said. “US banks are aggressively lending and now 25 people will bid for the same company.”

He saw this as not ending well for the companies that were purchased. “The trouble is the asset lasts longer than the debt,” he said.

Due to the overcrowding in the market Siguler Guff is finding it hard to allocate and is sticking to what co-founder Drew Guff described as niche markets.

Siguler said that the “sweet spot” was small companies purchased at five to six times cash flow, where it could dictate the terms.

He spoke in a session at the conference entitled Private Equity 3.0 in which Marcus Simpson, head of global private equity at QIC, spoke of how his team was insourcing a greater amount of expertise to help them become smarter buyers of private equity. QIC manages $5 billion in private equity from the $70 billion it manages on a fiduciary basis.

He thought this trend would lead to a much greater disparity of outcomes for funds. “With this 3.0 model there will be people who are good at it and there will be people who will fail, so there will be a bigger spread of returns,” he said.

Robert Credaro, head of growth assets at First State Super, echoed this point by stating that there was a distinction between funds that were allocating to private equity and those that were investing with some form of internal expertise.

“Funds are going to have to take on some complexity. It cannot all be taken on by the adviser or manager,” he said. “Those people who are allocating rather than investing would not want to do this, but you do not want to go where the lazy money goes.”

Over the last year, First State Super has built up a 1 per cent allocation to private equity that has been chosen on a case by case basis working with its specialist advisor Stepstone.

Investment decisions are based on getting the right fee and the right asset when compared to other unlisted asset opportunities available to the fund. If the opportunities are available Credaro said the fund could build up to 5 per cent in private equity, but equally if they were not there, or fee outcomes could not be improved, then the allocation could be much less than this/

He also foresaw concentrated portfolios of private equity as the ideal investment approach as it would allow for greater involvement and learning.

“If you allocate a significant proportion of the fund, say 5-10 per cent, you are only likely to get the best out of the sector by being closer to your investments and so really understand what the managers are doing.”

He predicted that the intellectual property transfer would be inevitable from such a model and that it would allow a more proactive relationship with fund managers whereby they could give back advice on market opportunities.