Private equity investors are unlikely to see the 40 percent returns witnessed in the 1980s but returns of between 20 and 25 percent are possible going forward, the head of Goldman Sachs Asset Management's private equity division said on Tuesday.
Charles Baillie told Reuters at the ICBI Super-investor conference in Paris that good returns were still possible because prices were not yet over-stretched.
"On a P/E (price to earnings) basis we are half way between the highs of 1998 and the lows of 2001," he said.
"The question is will the (US) economy continue to be strong? If it does we could get into nosebleed territory but my guess is the economy will slow down or putter along."
Baillie said tracking listed micro-capitalisation stock indices was an easy way to judge the performance of private equity investments as they tends to be the same, though with a lag effect.
So far this year micro-cap indices such as the FTSE fledgling index have performed well, up 11.4 percent since January.
CHALLENGES AHEAD: However, Baillie said private equity funds were facing a number of challenges such as increased competition, particularly in Europe, where large US firms had entered the market and were "squeezing" existing players.
He added funds are also taking on more risk than previously by increasing the leverage (borrowing) on the companies they invest in.
This was partly due to the increased competition in the industry but also because investors now had a greater appetite for risk.
"People's views are changing, there's less concern about bankruptcy and people are pricing risk more cheaply. I don't think risk can become much cheaper."
Baillie said the increased competition in the industry was pushing several changes. For example managers were no longer relying on making money from simply buying and selling companies but were taking a greater role in restructuring and managing companies.
There is also a trend towards private equity managers being more proactive and approaching companies directly rather than waiting for companies to contact them.