WHAT FINK MIGHT DO WITH BGI - FTSE

PRIVATE EQUITY: IMPROVING OUTLOOK
22
In the Markets
as auto parts, for example. “It would
be reasonable to expect general
partner reluctance to call capital
without a significant amount of
limited partner support,” says Ellis.
“[However,] we are not seeing
defaults or threats of default.”
Kathy Jeramaz-Larson, executive
director of the Institutional Limited
Partners Association, a Toronto-based
association dedicated to private equity
investors around the globe, wonders
whether the talk of limited partner
default is real or if it is simply an urban
legend.“I have not heard from either
limited partners or general partners of
any limited partner defaults,”she says.
“That’s not to say they aren’t
happening—it’s just that I am not
aware of any specific instances.”
Jeramaz-Larson has heard of
situations where investors have made
hard decisions not to reinvest in the next
fund offered by a particular sponsor,
however. That’s consistent with Coller
Capital’s finding that 31% of limited
partners plan to reduce the number of
general partner relationships they have,
and that 20% intend to cut their
allocation to private equity in the next
two years. Investors also expect that
25% of private equity sponsors will be
unable to raise new funds, effectively
putting those firms out of business
when their existing funds liquidate. If
investors can afford to wait, a
combination of future distributions
and passing up opportunities to
reinvest with some managers will get
their allocation back on target. The
secondary market is always an option
for those under immediate pressure,
too. “Not only do they get some
consideration for what they invested
in the fund but they get relieved of the
ongoing commitment,” says Coller
Capital’s Morgan. “I expect people to
find that attractive.”For most investors
under pressure from excess exposure
to private equity, default on capital
calls is likely to be a last resort.
UK SURVEY CHARTS UPS &
DOWNS OF PRIVATE EQUITY
The number of private equity houses is expected
to fall significantly over the next 24 months,
according to a recent survey carried out by the
UK accounting and financial services firm Smith &
Williamson. The survey of 136 private equity senior
executives was conducted between 10th June and
3rd July 2009. Some 75 different mid-market
(£5m-£50m) PE houses responded, between them
representing more than two-thirds of all UK
mid-market PE transactions.
According to Brian Livingston, head of private
equity at the firm, some two-thirds of the 136 senior
private equity executives across the 75 firms polled
shared the gloomy prediction for the industry.
“Recent poor performance has meant many private
equity houses are being squeezed: they cannot raise
new equity funds and cannot raise bank finance
either, since the banks are increasingly focusing on
investors’ track records before committing finance for
deals. As a result, many firms are effectively unable
to make investments and may have little choice but
to merge or shut down,” notes Livingston.
While respondents overwhelmingly stated that
entry multiples on new investments have fallen since
2007, so far lower prices have not resulted in more
deals. Some 82% of the survey respondents agreed
that over the last two years it has become much
harder for companies to raise finance from private
equity investors. Moreover, 93% believe that more
private equity-backed businesses will breach banking
covenants in the year ahead. The private equity
community does not expect to get much help from
the government either. Only 12% believe government
policies will help to ease problems in the private
equity industry.
Livingston adds: “Even with lower entry multiples,
the lack of bank funding makes it difficult to
structure deals in a way which will generate
satisfactory returns. Instead, we are seeing more
and more private equity houses shifting their focus
from making new investments to preserving the value
of their existing portfolios.”
However, the outlook is brighter. Some 68% of
survey respondents think investor confidence will
begin to return, while half believe bank finance will
become more readily available in coming months
and 57% expect the current recession in the UK to
end by 2010.
S E P T E M B E R 2 0 0 9 • F T S E G L O B A L M A R K E T S