Although the private equity investment sector as a whole has been marked down, some companies are still in a position to take advantages of the opportunities ahead, according to manager
Although the private equity investment sector as a whole has been marked down, some companies are still in a position to take advantages of the opportunities ahead, according to managers at a recent roundtable discussion.
The roundtable, hosted by the Association of Investment Companies, HgCapital Trust and Electra Private Equity, found that some believe private equity will play a role in the economic recovery. They feel private equity will be able to step in where the banks are unable to provide finance, and potentially buy illiquid assets from the banks.
Tim Syder, deputy managing partner of Electra Partners, said: ‘Do I think that the private equity model is broken? No. Certainly the parameters have changed. But private equity will adapt. 2009 and 2010 are going to be the years of ‘money in’ deals – to refinance, restructure or provide the necessary facilities to make acquisitions. To do the deals that banks won’t do. Forced selling will bring great opportunities for those with capital to invest, providing much needed liquidity in exchange for assets with the potential for substantial value appreciation. We know that the best returns come from investments made at the bottom of the cycle and private equity is no exception. Once company valuations come down (and I believe that they have a way to go yet), there will be outstanding investments made in ‘new world’ deals. In short, we are entering the best environment for new deals for 20 years or more.’
Ian Armitage, chairman of HgCapital, said private equity will play a large part in sorting the problems that the recession will create, bringing capital and expertise to the table.
‘As a believer in the propositions that the quality of management and alignment of interests have a huge bearing on corporate performance, I take comfort from the increasingly accepted fact that the private equity model is best placed to recruit and reward the best management talent available,’ he said. ‘ And as one of the few industries with readily available cash, private equity will likely be a key player in getting the economy moving again.’
Managers in the wider private equity investment company arena agree.
Brian Scouler, principal fund manager, Dunedin Enterprise Investment Trust, said: ‘Private equity continued to make returns through recessions in the past. We believe this will happen again, once confidence and stability return to the debt markets. Private equity is a long term asset class. We have the financial resources to take advantage of new opportunities when they arise, and our record of working closely with incentivised management teams will bear fruit again in the future. History has shown that some of the best financial returns have been made on the recovery from a downturn.’
Despite the current issues in the private equity investment company sector, managers remain convinced of the advantages of the listed private equity investment company structure.
Armitage said that due to their stock exchange listing, private equity investment companies offer investors access to an established, transparent portfolio for the cost of a share. Because of the listed structure, investment companies can be long-term holders and do not have to worry about having to sell good quality stock to meet redemptions.
Scouler added that the majority of companies in his firm’s portfolio are trading satisfactorily and it continues to work closely with them to protect and add value.
Daniel Godfrey, director general at the AIC, said: ‘The private equity investment company sector has been one of the strongest long-term performers in the past, and the current issues illustrate the importance of taking a long-term view, doing your homework, and having a balanced portfolio. One of the advantages of the private equity investment company structure is the stock exchange listing, which means the sector has a level of transparency and oversight which is difficult to find in the wider private equity universe.
‘Of course the listed, closed ended investment company structure cannot overcome the illiquidity of the underlying assets, and investors do need to be realistic. Whilst the stock exchange listing means investors can always exit their investment, which is an advantage, in difficult markets they may have to take a significant haircut on the price – as the current discounts illustrate.’
