Private Equity Future
Clues of Private Equity's Future from Jack Perkowski
Like most people, I have been anxiously following the recent financial developments, but especially in regards to private equity. The financial crisis has made it increasingly difficult to make predictions of the future of private equity; with so much chaos and fluctuation in the market there have been conflicting guesses as to private equity's future. Today, I found a great insight into what the top industry leaders are thinking through Jack Perkowski's blog Managing the Dragon.Mr. Perkowski is a highly successful businessman in China and author of Managing the Dragon and he recently spoke at the SuperReturns conference along with big private equity names like David Rubenstein and Steve Schwarzman. Jack Perkowski reveals some points made at the event that found a general consensus among the private equity leaders speaking. I believe that these points provide some clues to the future of private equity from the best in the business:
- Long Recovery: No one thought that the recovery from the current financial crisis would be quick. In fact, approximately 90 percent of the attendees thought that it would take three years or more for financial markets to recover to their 2007 highs. Of these, 38 percent thought it would take more than five years. Most felt that the United States and Europe, in particular, were in for long and nasty recessions.
- Traditional PE Business Models Won’t Work: The days of using financial engineering (high leverage, “covenant light” debt and arbitraging higher exit multiples) to generate returns are gone. With the consolidation of the banking industry globally, there are fewer lenders today than there were yesterday, and the ones that are still standing have opportunities to buy existing debt in good companies at substantial discounts to their face values. While cost cutting can improve profitability, companies cannot cost-cut their way to prosperity. Therefore, the premium is on growth as the way to generate acceptable private equity returns in the future.
- Minority Interests and Buffet: Traditionally, PE firms have taken control positions in companies and have generally shunned minority investments. In this turbulent financial world with debt financing scarce, the head of a major global PE firm expressed the view that minority interests and “buy and hold” strategies might become more prevalent, specifically citing Warren Buffet’s recent strategic investments in General Electric and Goldman Sachs as examples of what the future might hold. Following on this point, the moderator remarked that when Warren Buffet was asked to explain his strategy for determining when and under what circumstances to sell a company, he responded by saying: “I don’t know. I’ve never sold one.”
- Emerging Markets versus Developed Markets: As readers of MTD know, the term “emerging markets” was coined by my friend, Antoine Van Agtmael http://managingthedragon.com/index.php/2008/09/28/2008-world-business-forum/ in the early 1980s. It now refers to about 200 countries—essentially all of the countries in the world outside the United States, Canada, Western Europe, Japan and Australia. A head of one of the major global firms thought that the term “emerging markets” had outlived its usefulness because it was now so broad. For example, lumping the countries of China and Chad into one category is not terribly meaningful. In the words of this individual, the term “developed markets” should be changed to “submerging markets.” More than anything, that remark characterized the views of the conference.
- Places to Avoid Investing: Europe and commercial real estate, anywhere.
- Highest Future Returns: Approximately 60 percent of the participants thought that the best returns over the next five years would come from the Asia and India region. While the current credit crisis would lead to recessions in many countries, most felt that it would merely slow the growth rates in China and India. In this context, the current crisis might actually be a blessing in disguise for China by providing an opportunity to cool down the overheating of the economy experienced in 2007.
Tags: Private Equity Future, Private Equity Future Outlook, Private Equity Industry, Private Equity and the Financial Crisis, The Future of Private Equity, jack perkowski, Private Equity Outlook
Link to This Resource: Private Equity Future
http://privateequityblogger.com/2008/10/private-equity-future.html