Private Equity Firms and Hedge Funds Face Uphill Battle

The worst of the recession seems to be over, but the crisis has done irreversible damage to many industries. Hedge funds and private equity firms are among those that are finding out that life after the recession is not as easy as it used to be before it.

At the height of the financial crisis, both private equity firms and hedge funds faced some serious redemption pressure which threatened their very existence. Many companies simply refused to repay the investors at that time or imposed severe restrictions on withdrawals. This completely changed the investors’ perception of these funds and the investors have now become much more demanding. These companies are now finding out the hard way that you can not just make your investors angry and get away it.

Investors, especially large ones, are now asking for complete transparency in the functioning of these funds. They want to be regularly updated on how their investments are performing and what the fund is doing to make sure that they do not suffer losses. Fulfilling these demands takes a lot of administrative, legal, and accounting effort, which adds to the costs of running a fund.

The hedge fund industry is also suffering from a loss of credibility because of the Bernie Madoff fraud. Investors do not want to trust a fund blindly any longer and smaller firms are finding it hard to convince them that their money is in safe hands.

Private equity firms are facing problems of their own. The bonuses of partners and employees are directly related to how much money the firm makes by selling its portfolio companies. The market has not recovered to the extent that such sales can be executed at prices high enough to make significant profits. In addition, large investors like pension funds are demanding that the fund managers take a fee cut as their performance does not justify the lofty amounts that they have been charging.

All these problems have resulted in a lot of pressure on the profits of hedge funds and private equity firms, and there is no quick fix in sight. Although the fund managers worry about lower bonuses, many people outside the industry would see this as a welcome change. The anger against large investment banks for bringing the economy so close to a complete collapse has rubbed off on these firms, and there is a lot of resentment against them among the general public.

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