Uncertainty makes the private equity market challenging

By Ben Hedenberg
last updated Sunday, June 30, 2012

A dense fog of destabilizing uncertainties

The global private equity industry is facing a challenging financial outlook with a dense fog of destabilizing uncertainties. The US and several EU economies are week, hobbled by stagnant household incomes and anemic public spending on various unfunded programs. Businesses i general show a hesitancy to invest and appear to wait until a more growth friendly environment appear. Policy makers in the Eurozone have managed to improvise a patchwork of solutions to hold the currency union together without facing an imminent collapse. This has not yet comforted business decision makers who are seriously concerned about the a collapse of the fragile Eurozone with potentially catastrophic consequences for the economy. Given the ambiguity in the debt markets and uncertainties in the world economy, a slowdown in private equity investment activity was not unexpected.

Private equity activity declined in the first quarter of 2012, according to the Private Equity Index (PE Index). Investment volume, which fell by 70%, was the primary driver for this trend, while declines in fundraising and exit volumes acted as secondary factors. In 2012 Q1, the PE Index registered at 87.1, below its ten-year moving average, but still above index levels in late 2008 and early 2009.

North America is still the dominant private equity investor accounting for 55 percent of the global investments. The highest rank countries 2011 where USA (53%), UK (6.1%), France (5.8%) and Sweden (3.7%). Although about half of General Partner's in North America and Western Europe rated fund-raising prospects as “negative” or “very negative” in a late-2011 survey, that pessimism has not yet caused GPs to reduce their fund-raising targets. Approximately three-quarters of buyout funds currently on the road aim to raise the same or larger fund than their previous one, and nearly one-quarter set the goal for their new fund to raise 50% more.

Since 2007, exit trends by industry have remained relatively steady, though the first quarter of 2012 marked a few subtle shifts. The Business Products & Services (B2B) industry, a private equity investment staple and a particularly attractive industry due to recurring cash flows, once again accounted for the largest percentage of exits last quarter. The industry’s share of the activity even grew slightly to represent 36% of the exit flow with 41 exits. Also on the rise during the first quarter was Information Technology, which was responsible for a 18% share as 20 companies in the industry were sold or taken public.

The U.S. private equity industry continues to face challenges when it comes to fundraising, as shown by the continued sluggish activity seen in the first quarter of 2012. 26 funds closed during the quarter on a total of $20 billion in commitments, on par with the second half of 2011. It is though premature to predict that there will be a shakeout among PE firms.

With developed economies stuck in the doldrums, PE’s fascination with the fast-growing emerging markets continues to intensify. Captivated by robust emerging market GDP growth, increasingly sophisticated companies and managers, and their seeming exemption from the debtmarket woes that beset Europe and North America, LPs continue to pour money into funds that target emerging market opportunities. however, that long-anticipated potential has failed to materialize to the extent investors had hoped. While emerging market fund-raising has garnered an increasing share of global PE capital raised over the past decade, PE deal value and exits have not kept pace.

With the emerging economies still on the lower slopes of all of that anticipated growth, the theory holds, they will surely soak up all of the PE dry powder currently earmarked for investment, and much more, as their GDP expands. When weighed against these broader indicators of PE readiness, some of the most attractive potential markets for investment are not necessarily the ones that have been the principal focus of GP and LP attention. Indeed, according to the widely used IESE Business School’s Global Venture Capital and Private Equity Country Attractiveness Index, Southeast Asian economies now rank among the leaders and Singapore is the region’s hub.

Mony to building

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