Private Equity Is on a Roll, but Are Investors in for a Let-down? (Knowledge@Wharton)

"With $660 billion in corporate buyouts last year and a war chest of $750 billion still to deploy, private equity investors are on a roll, but concerns about the sector's ability to deliver sizeable returns are also welling up. Angel investor Rob Weber's first reaction was surprise when a hedge fund swooped in a few weeks ago to snap up the entire $10 million second-round financing of a life sciences startup he owns."

"Amit [Wharton professor] says liquidity events, such as an IPO or a sale to strategic buyers in the same industry, are now taking much longer than they once did. In 1999, it took less than two years for investors to cash out of an investment through an IPO, but in 2006 it took more than five years, he notes. The timeframe has also expanded in the other chief form of private equity exit -- merger and acquisition deals. In 2001, it took an average of about 18 months to do a sale or merger, but by 2006 the timeframe had stretched to more than five years.

Savor [Wharton professor] points out that private equity firms may shift toward a completely new model in which funds hold companies longer and repay their investors through dividends. "In the past, IPOs were the preferred exit, and I would say they will remain so in the future," he says. "But if for some reason they do not, private equity shops will find other ways to monetize their investment -- as long as there is something to monetize."