2012: Are Private Equity Players Going to Survive?
Date: Wednesday , February 01, 2012
The Great Recession that is just passing has left the global economy severely traumatized, and now the disturbingly unstable European economic situation and sprouting movements in the lines of ‘occupy wall street’, is pushing it to the breaking point. Analysts and experts are predicting that this frail economy will soon give way for another major recession. All these, make it very clear that the Private Equity players are not entering into a ‘dream come true’ new year. Now, add Mitt Romney, the probable republican presidential candidate, into this mix and we have ourselves a lethal mixture, which has the potential to ruin the PE world. So, how is all this adding up and what is going to be the scenario for the PE players this year?
The campaign that Romney's political rivals have started against him has tarnished not just him, but the whole PE community. The tag ‘job-killers’ will not be so easy to get rid of, especially in today’s deteriorating economic conditions. PE players know this and are now trying to repair this damage as well. “There is a lot of misinformation being spread, purely for political purposes and on both sides of the aisle, as it pertains to private equity. What’s been lost is an understanding of the critical role that private equity investment plays in growing the U.S. economy and delivering more than a trillion dollars in investment returns to pension funds, endowments and charitable foundations. While the business model has evolved over time, the fact of the matter is private equity provides capital and operational expertise to companies that are often underperforming or on the brink of failure,” says Steve Judge, Interim President and CEO, Private Equity Growth Capital Council (PEGCC). This statement that came on the wake of the attack on Mitt Romney, points out the gravity of the situation. But will they be able to undo the damage that has already been done and will be done in the course of Romney’s campaign?
Buyouts are turning out to be the order of the day, “U.S. buyout and corporate finance funds raised $86.7 billion across 175 funds in 2011, a 42 percent increase in capital over the previous year. Within this sector, buyout and acquisition fund-raising increased significantly, as 75 funds raised $43.3 billion, more than double the 2010 total,” point outs a press release from Dow Jones. But from the Mitt Romney issue it is very clear that buyouts have a major negative inclination, and this can, and will be exploited by opponents. Even though buyouts offer closure to shareholders they are sure to kill a few jobs. In today’s world, where even developed countries are facing unemployment rate on the north side of nine percent, the damage a tag like ‘job killers’ brings, will go a long way. So it would make much sense, at least in the first few quarters of 2012, for PE players to restrain themselves from getting much captivated by the opulence of buyouts.
Also, the responses received to IPOs by companies like LinkedIn and Groupon makes one wonder if we are over-evaluating again, if we are heading for another bubble burst. No one, in their right senses, should forget the dotcom bubble burst and any hint that the economy is heading for another should be taken seriously. PE players should keep a check on the developments of the IPO space and make sure, even in investing, they are not repeating the mistakes they made towards the end of the last century. Moreover globally economy could not survive another bubble burst at this point.
When we compare 2011 with 2010, what we see is an increasing and flourishing market, but if one is to take a step back and observe, it can be noted that this is anything but the reality. U.S. venture capital funds raised $16.2 billion across 135 funds in 2011, a 5 percent increase in capital raised despite a 12 percent decline in the number of funds that won commitments. Annual fund-raising, however, is now just over half the 2008 (an industry before recession) total, showing that the industry has not yet bounced back from the recession. “Difficult market conditions have seen fundraising figures for funds of funds drop significantly in 2009-2011; $11.3 billion had been raised during January - November 2011, compared with $60.2 billion when fund of funds fundraising reached its zenith in 2007,” according to the 2012 Preqin Private Equity fund of funds review. The review also points out a decline in the amount of capital fund of funds managers are targeting for their funds, with average final closes dropping from $369million in 2007 to $234 million in 2011. This stands testament that the industry is way down from its glory days. This is directly related to sluggish grow of the global economy; investors seems to be extremely cautious about their money and this is slowing down the fund raising of the PE players. The industry is still not out of its struggling phase and here pops the question, what will happen if the world is struck by another recession at this point?
“Global economic growth started to decelerate on a broad front in mid-2011 and is estimated to have averaged 2.8 per cent over the last year. This economic slowdown is expected to continue into 2012 and 2013,” says World Economic Situation and Prospects (WESP), a joint product of the Department of Economic and Social Affairs, the United Nations Conference on Trade and Development and the five United Nations regional commissions. This, again, points out to the frail nature of the global economy. The report also says, “Failure of policymakers, especially in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating poses the most acute risk for the global economy in the outlook for 2012-2013, with a renewed global recession being a distinct possibility.” Furthermore, it suggests that, even though a meager growth rate of the Europe and the U.S. might not cause another global recession, a total collapse of these economies might. There is nothing that is suggesting that this trend of global economy will change in this year, on the contrary, one has to expect the trend to continue till the next year if the status of the global economy is to remain as predicted by the UN.
From all these, it is can be said that if high hopes should not be put on financial prosperity this year. 2012 does not seem to put forth a positive equation for the PE players. With the uncertainty brewing in the market, it will be difficult to raise funds for investments, and to complete successful exits. The last quarter of the first decade of the new millennium was not very good for them, and this year shows little signs that say that this would be any different.