Private Equity Review: Is the Sector Turning the Corner?

Recently, some of the leading players in the PE industry gathered at the Wharton Private Equity and Venture Capital Conference – “A New Dawn: Investing in the Post-Crisis World,” – 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 lower portfolio valuations. The weaker PE firms have either closed or hunkered down, unable to raise new funds. The larger and savvier firms boasting sufficient liquidity weathered the storm by putting their portfolio companies through tough restructurings and trimming their own management expenses.

The general feeling among the speakers is that the US PE industry is slowly shifting from retrenchment to opportunity. The sector’s best prospects lie in emerging markets while the European PE market is expected to contract.  Some of the key conference takeaways include:

The industry survives to fight another day

Most participants were quite sanguine.  One partner in a large firm, commenting on the so-called death of private equity, said: “It was a great storyline at the depth of the crisis, but I don’t think you will see firms failing by the wayside.” You will see the resilience of the industry as a whole. Some of the larger firms will be a bellwether for that resilience.” 

The larger, well-positioned portfolio companies that aggressively cut costs early on will emerge from the downturn even stronger.  One bonus carried forward from the boom years: Much of the PE financing in place has few or no covenants, which gives companies some breathing room.

 Liquidity remains paramount

Although liquidity is improving, it is nowhere near pre-crash levels.  PE firms have had two years to adjust to a credit retraction and have (by and large) taken the necessary restructuring measures.  Given this ‘new normal,’ PE managers are being proactive in working with their portfolio boards to help them make the difficult decisions needed to ensure survivability. One insider said:  “We are making sure our companies are well capitalized and not over-leveraged, or if there is leverage that it is benign or long-dated. We are shoring up balance sheets where needed.”

PE firms needs to add more value to their portfolios

Smart money and expertise is in demand.  Increasingly, PE firms are providing more value-add support to assist their portfolio companies in areas such as cost control, sales and IT enablement.

New opportunities exist but can they be exploited?

Valuations for North American businesses should remain modest as the economy moves up from the bottom of the business cycle. According to one commentator:  “Historically, the best deals are done coming out of a crisis. Leverage is lower, growth is higher. Leverage and the purchase price are aligned. So this could be a good period.”

Emerging markets could save the day

Hungry investors looking for new investments ought to consider fertile PE opportunities in large and rapidly growing emerging markets like Indonesia, Brazil, India, China and Russia.  However, each of these countries are in a different stage of economic maturity and possess a unique combination of opportunities and challenges.  The risks include: immature capital markets, potential currency devaluations, weak infrastructures and political uncertainty.

Furthermore, there are issues finding the right funds to partner with. Since most funds now in operation were established between 2006 and 2008 – and have not yet made distributions – there is not much of a track record on which to judge fund managers.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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