Diversified financial and real estate funds still interesting investments, says Frost & Sullivan
For the private equity sector, 2011 was a roller coaster year, with the first half retaining the momentum from 2010 and the second half being affected by the global economic scenario.
Fears of a double dip recession and credit downgrades in the West had an impact on the private equity industry in terms of fund raising, deal activity and exits.
However, diversified financial and real estate funds continue to be attractive investments with financial technology being the most interesting opportunity. Emerging economies also hold a strong potential.
A new analysis from Frost & Sullivan on Private Equity and Venture Capital Investment Trends in the Financial Services Industry in Europe reveals that private placements in the financial services sector in Europe declined 30 per cent in 2011 in comparison to 2010. The average deal size of the sector has decreased, which indicates a decline in investor confidence.
“Last year banking and insurance witnessed a fall in private equity activity,” says Frost & Sullivan financial analyst Sheetal Kothari. “The average time taken to raise funds has also significantly increased by more than 80 per cent (11 months to 20 months) from 2006 to 2011. Additionally, there were fewer number of funds raised in 2011, compared to the fund raising cycle of 2005–2008. Due to sluggish growth and increasing risk in developed economies, fund raising will continue to be a challenge in 2012–2013."
The trend regarding deal activity for private placements in the financial services sector mostly resembles that of the overall private equity market. Although there has been significant rebound in deal volume post the 2008 crisis, overall investments in financial services have been on a downward trend since 2008.
“The reasons for the decline in activity are weak financial and capital markets, low investor confidence, credit downgrades and the Euro zone crisis, all of which have resulted in investors looking out for new avenues and other sectors for investment,” says Kothari.
With many limited partners reassessing their current investment allocation in the private equity industry, it is becoming increasingly important for general partners to look beyond their usual sources of capital.
Fund raising statistics for 2011 indicate that Asia and the rest of the world have accounted for 22.4 per cent of the annual private equity funds raised globally. This compares to 8.6 per cent in 2003 and about 15.9 per cent of committed capital in 2006 from the same region.
Moreover, studies show that investors from these regions may increase their allocations to private equity asset class over the next 10 years. This would reinforce the increasing role that this region will play in the industry in the future. Private equity funds therefore, need to broaden their scope of fund raising to new regions and scout for potential investors in economies outside Europe and North America.
“Emerging economies provide an attractive avenue for divestment to investors who are willing to broaden their scope,” says Kothari. “These countries have greater fund raising opportunities and greater scope for growth when compared to developed countries in the current economic scenario.”
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