The outlook for the private equity industry looks at its brightest since the onset of the financial crisis despite tighter regulation in prospect within the European Union and elsewhere, according to industry experts.
Worldwide 81 funds held a final close in the third quarter of 2010, raising a total of USD57bn, but the total fell to USD32bn raised by 92 funds in the final three months of the year, according to research firm Preqin. The aggregate of USD225bn raised over the year as a whole was the lowest annual total since 2004.
There are reasons to believe that the pace of fundraising may pick up in 2011, although competition for commitments from institutional investors remains strong. “A number of investors remain on the sidelines and there is still concern regarding the health of the global economy,” says Tim Reid, founder of private equity consultants TMR Strategic.
“That said, for some types of investor, especially large pension funds and funds of funds, it will be difficult to remain on the sidelines through 2011. Investors are having to ask themselves whether they are they committed to the asset class or not.”
Distressed and turnaround funds are regarded by some industry figures as more attractive in the current climate, and the risk/return profile of infrastructure investments is seen as having an edge over other asset classes. Differentiation is also more important than ever as investors require managers to demonstrate their competitive advantage in their chosen geographical areas.
Private equity lawyer Matthew Hudson, a veteran of several big-name law practices as well as spells as a private equity principal, says that in the current climate firms may need to be innovative in their remuneration structures – although lowering fees is not necessarily the answer.
He says: “It’s useful having an understanding of other ways of structuring funds across different asset classes, including-ended funds, Ucits and managed accounts where you’re venturing into hedge fund territory. These are very popular post-Lehman because they’re very simple.”
It’s also important for private equity managers to admit problems and return unused money from earlier funds, says Hudson, who now heads specialist London-based firm law firm MJ Hudson. “Nothing sits better with limited partners than getting cash back.”
In the wake of the crisis transparency and information-sharing are seen as crucial to restoring trust and investor confidence in the asset class. Indeed, the ability to provide timely and relevant information to investors can be a source of competitive advantage for general partners.
Justin Partington (pictured), commercial director at specialist private equity fund administration firm Ipes says that the past 12 months has seen an increased focus on raising the standard of reporting across the industry, driven by organisations such as the Institutional Limited Partners Association (Ilpa).
“This is driven by investors and industry bodies,” he says. “In addition to Ilpa, the British and European Venture Capital Associations have both updated their guidelines. Institutions
are benchmarking GPs based on the quality of their reports and it is also something managers are proactively looking to address, as it can have an impact on fundraising.”
