Private Equity: 2010 & Beyond – The Times They Are a Changin

The economic shocks of 2008 will trigger major changes for the Canadian and US Private Equity industries in the short to medium term, if not forever.

Knowledge@Wharton, a publication of Wharton Business School, recently published a report on the future of the Private Equity industry. According to the report, changes will be manifested through reshaped portfolio investment decisions, innovative capital structuring and new operating models for many firms. One example is the amount of equity required. Deals that settled for just 15% in equity a couple of years ago now require 35% to 40%, and up to 75% for some smaller buyouts. Moreover, a “wall” of refinancings due in 2012 will challenge the survival of many portfolio companies and PE firms as well. Furthermore, with leveraged buy out activity at a nadir, many Private Equity funds will increasingly take on the role of a turnaround specialist by investing in distressed firms. Finally, we will see the emergence of a robust secondaries industry (the buying and selling of pre-existing PE commitments) as Private Equity firms look to extricate themselves from losing commitments.

In The Coming “Wall” of Refinancings, Private Equity players will be scrambling to prepare for the onset of refinancings beginning in 2012. Savvy Private Equity firms should be focusing on optimizing portfolio company operations, exploring new positions in the capital structure and considering strategic, synergistic transactions.

The article, Continuing Defaults by Private Equity Portfolio Companies Transform the Middle Market, discusses the rebirth of the traditional middle-market deal. Opportunities, or “gems,” are still available for investors in midsize deals if they approach transactions creatively and consider taking new and innovative positions in companies’ capital structures.

A key conclusion of True Turnaround Specialists are Poised to Survive in Today’s Challenging Private Equity Market is that PE firms are turning away from leveraged buyout deals towards investments in distressed companies. Specialists in distressed businesses expect a tidal wave of private equity deals made in 2006 and 2007 to go bad in the next few years. Given the number of opportunities and the lack of bankruptcy credit, many restructurings will occur outside of bankruptcy court and could result in swift liquidation.

Finally, Private Equity Secondary Funds: Are they Players or Opportunistic Investors? looks at the activities of investment managers involved in the private equity secondaries industry, the buying and selling of existing PE commitments. Wharton sees distressed sellers continuing to act as a source of growth through 2010 and predicts the role of secondaries will grow over the medium and long term.  These firms provide a good source of short-term liquidity, allowing larger PE positions to change hands and making it easier for investors to adjust their PE portfolios.

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1 comment so far

  1. […] – to discuss the current state and prospects for the global Private Equity Industry. The past couple of years have been gut wrenching for the majority of firms, driven by unprecedented de-leveraging, a reduction in new capital infusions and significantly […]

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