(Reuters) - Private equity firms are paying more for leveraged buyouts to keep pace with soaring valuations of acquisition targets, making some investors leery of whether the industry can keep delivering on promises of lucrative returns. The booming stock market and cheap debt financing have helped push leveraged buyout prices to a record high, driven by sectors that have grown as people work and stay at home during the COVID-19 pandemic, such as technology and business services. Private equity firms paid an average 13.2 times a company’s annual earnings before interest, tax, depreciation, and amortization (EBITDA) for U.S. leveraged buyouts in 2020, an all-time high, up from 12.9 times in 2019, according to financial data provider Refinitiv. Graphic: U.S. leverage buyout multiples -Some investors are growing concerned about whether buyout firms can deliver the 15% to 20% annual returns they target when they raise new funds. “We can tilt towards better valuations and opportunities,” said David Holmgren, who oversees $3.5 billion in endowment and pension assets at Connecticut-based hospital system Hartford HealthCare. He said he has been shifting his portfolio away from private equity funds that invest in pricey buyouts to those that specialize in middle-market deals and emerging markets. Many banks have grown reluctant to help finance leveraged buyouts at inflated valuations, exacerbating investor concerns about overpaying, investment bankers and private equity executives said. Private equity firms must write bigger equity checks, making it harder to juice returns through use of debt. The share of U.S. leveraged buyouts where private equity firms put down more than 50% of the deal price as equity jumped to 41% in 2020 from 25% in 2019, according to Refinitiv. “Bigger equity checks are needed for deals where prices are high. For a business with any growth, some buyers are willing to pay astronomical prices,” said Rob Fullerton, global head of leveraged finance at investment bank Jefferies Financial Group Inc. For example, buyout firms TPG Capital and TA Associates paid the equivalent of 16.5 times the annual earnings of Planview Inc when they acquired the U.S. work management software company in December for $1.6 billion from Thoma Bravo, another private equity firm. Thoma Bravo had paid 6.7 times the annual earnings of Planview when it first acquired it from Insight Venture Partners for $800 million in 2017, according to financial data providers Refinitiv and Pitchbook. TPG declined to comment, while TA Associates did not respond to a request for comment. While some private equity firms are willing to place risky bets on fast-growing technology companies that have yet to turn a profit, banks are more reluctant, said Gero Wittemann, partner and co-head of U.S. at Hg, a London-based private equity firm with $30 billion in assets under management. “These companies inherently are more difficult to leverage,” Wittemann said. FUNDRAISING SLOWS DOWN Buyout firms typically hold onto acquired companies for three to seven years, so it will be awhile before their investment returns reflect the current record deal prices. There is evidence some investors are apprehensive. U.S. private equity fundraising dropped to $203.2 billion in 2020 from its record high of $320.5 billion in 2019, according to Pitchbook. Investors still have faith that private equity firms can deliver strong returns by making companies better, rather than snapping them up on the cheap, said Brian Gildea, head of investments at Hamilton Lane, a major investor in private equity funds. “Valuation matters, but it’s one of many things that matter in generating returns. Our data shows returns in our asset class don’t come from buying assets cheap,” Gildea said. Private equity firms are becoming more selective. The total volume of U.S. leveraged buyouts dropped to $84.7 billion in 2020 from $124.3 billion in 2019, according to Refinitiv. Some buyout firms that do agree to sky-high prices insist that they manage to clinch concessions that protect their downside. These include earnouts that allow them to pay the purchase price in installments contingent on the company’s future financial performance, as well as priority in recouping their investment among shareholders. “General partners have negotiated to ensure that valuations are in line with return expectations and to regulate downside risk,” said Erik Wong, co-investment partner at Pantheon Ventures, which invests in private equity funds.