A leading private equity executive has warned that the industry’s investment model is heading for significantly lower returns in the wake of the current credit crunch.
A leading private equity executive has warned that the industry’s investment model is heading for significantly lower returns in the wake of the current credit crunch.
‘The private equity market is slowing down markedly,’ Jon Moulton, managing partner of private equity house Alchemy, told an audience of finance directors during a panel discussion at the Chartered Institute of Management Accountants annual conference.
‘A lot of returns have been financed by the galloping debt market. However the money from collaterised loan obligation vehicles has now dried up – there simply is no money left. Large buy-outs are therefore unfundable at present. I predict an era of significantly lower returns.’
Moulton also warned of possible serious fallout arising from the collapse of accounting due diligence on some of the larger deals witnessed at the peak of the cycle earlier this year.
‘We have seen in the last two year bubble a loss of integrity in the system and we have seen excess,’ he said. ‘When many of the processes and controls are not there, you have a high risk of serious errors and a sporting chance of fraud.’
While Moulton agreed that the private equity model would continue to play a significant role, he said this would require a substantial change in its investment model change.
He was echoed by panel member Simon Laffin, a consultant and adviser to private equity firms including CVC Capital Partners, who said: ‘Private equity will continue to play a significant role in the economy, but it will have to evolve. It will have to be cleverer at buying assets. Private equity houses will probably focus more on building businesses through corporate development.’
