>OBITUARIES ARE PREMATURE (DEUTSCHE BANK)

The financial crisis is not sparing the private equity industry. High uncertainty and a dearth of debt financing are making acquisitions difficult. The volume of new buyouts has slumped dramatically. The recession is hurting private equity (PE) funds’ highly leveraged portfolio companies particularly hard. Asset write-downs and lower returns are likely. Last year, European buyout funds lost over 25% in value on average.

But obituaries are premature. Two qualities help the private equity industry in the present crisis. Firstly, many (but not all) PE funds have considerable capital reserves. They can use these reserves to support portfolio companies or to seize new investment opportunities. Secondly, more and more companies are in need of restructuring. Here, private equity can leverage its traditional strengths.

Recession can be a good entry point. A historical comparison shows that the returns of the top PE funds are higher the lower GDP growth was in the year they first invested (vintage year). This suggests that PE funds benefit from price falls during a recession. However, the higher macroeconomic risks need to be taken into account, too. Moreover, not every potential seller is willing to accept drastically lower prices.

Private equity must adapt to new conditions and focus on old strengths. The market is currently highly sceptical of mega or highly leveraged buyouts. The focus is therefore shifting to small and mid-sized acquisitions and minority stakes. There is also growing interest in investments in emerging markets. In future, returns will be driven less by cheap debt and more by the traditional strengths in the operational and strategic modernisation of the portfolio companies.

To see full report: OBITUARIES