The private equity industry is undergoing big changes, with general partners potentially heading for a shakeout and limited partners increasingly seeking niche strategies, said PE specialists at a conference last week in Doha.

There are 1,900 private equity funds on the road right now, seeking a total of $900 billion, but they will probably only raise $300 billion, says Antoine Dréan, founder and CEO at Private Investment Initiatives. This $600 billion shortfall will mean “some of the GPs will disappear or morph into deal by deal structures or just move into other spaces”, he adds.

“For every group that disappears you will see one or two spin-offs,” says Dréan, leading to more niche players and fewer big players in the coming years. He was speaking at the Doha Conference on Asset Management, hosted by the Qatar Financial Centre Authority and Bloomberg.

There are some 10,000 GPs and 15,000 LPs globally, Dréan points out, suggesting there are too many players and too much money in the asset class. Over the 40 years of the PE industry’s existence, about $3.8 trillion in capital has been raised, with almost half of that ($1.8 trillion) coming in 2005-2008. And only about 25% of that money has been returned to investors.

“So on the one hand, LPs are desperate for cash [to come back]; on the other they like investing in PE,” says Dréan, but one must clearly be selective. Of the 10,000 GPs out there, he notes, there’s probably 1,000 with good ideas and a strong record.

Other PE executives point to a shift towards more niche strategies. A common theme is that LPs are looking for niche strategies that really drive returns, says James Zenni Jr, CEO of Z Capital Partners, which specialises in distressed assets. “LPs realise that ultimately, to justify the structures and fees, you’ve really got to be in a niche space.

“In some cases that means smaller funds, which can be more nimble, more opportunistic, and can look at deals that other firms can’t,” he adds, also speaking on the panel.

Investors in the Middle East, as elsewhere, want to see deal exits and therefore liquidity from older funds, says Ahmed Badreldin, Cairo-based senior partner at Abraaj Capital. The firm – which focuses on Asia, Mena (the Middle East and North Africa), Turkey and central Asia, sub-saharan Africa and Latin America – closed a $1.6 billion fund last year, he notes.

“The key thing now is to start showing exits, which is a real focus for us this year and next,” says Badreldin. “The good news is that strategic buyers are back – which have been a big source of exits. The bad news is that equity markets are still closed."

Moreover, he laments the fact that PE funds don’t buy from each other in the Middle East, whereas there are a good deal of secondaries transactions in more mature markets like Europe or the US.

Overall LPs are committed to Mena: “They’re the ones that understand and actively choose to invest in the region, as it’s not everyone’s flavour of the month right now, following the Arab Spring.”

For foreign capital, one issue with the Mena region is that sellers there are less sophisticated than in, say, Europe, where transactions follow a certain process, says Badreldin. Mena deals can take two to three years from origination to execution, he adds.

As for deal flow post-Arab Spring, “it’s had its ups and downs”, he notes. Abraaj had planned to do a large transaction in Egypt last year and “killed it because of what was going on”, but it went ahead with a smaller transaction, despite the country's politics-related turmoil.

In Europe, meanwhile, PE deal flow will be slow this year due to uncertainty and overhangs, says Roberto Quarta, Europe chairman at PE firm Clayton, Dubilier & Rice. “But people are starting to take a view on places like Spain, although they may not be ready to take a view on other places.”