Small and mid-market private equity firms are unanimous that the US is in an economic downturn and that an extended period of market uncertainty will adversely impact the industry, accordi
Small and mid-market private equity firms are unanimous that the US is in an economic downturn and that an extended period of market uncertainty will adversely impact the industry, according to a survey conducted by accounting firm Rothstein Kass, but these firms remain optimistic about their own prospects and in general have aggressive fundraising targets for 2008 and beyond.
Private Equity in 2008, Rothstein Kass’s first in-depth analysis of the private equity community, was co-authored by Russ Alan Prince, an adviser on private wealth, and Hannah Shaw Grove, an expert on the behaviour and finances of high net worth individuals.
The survey was based on telephone interviews conducted in the first quarter of this year with 323 managing principals of private equity firms. Participating firms have at least one – and in many cases several – private equity funds with total assets under management of between USD50m and USD300m.
‘The ultimate success of any private equity firm is dependent on its access to capital and its ability to find suitable transactions,’ says Steve Kass, co-managing principal of Rothstein Kass.
‘Because of the intense competition they face from larger players, investment banking operations and increasingly, from the alternative investment community, smaller and middle market firms are often among the first and most deeply impacted by prolonged weakness in credit markets. Consequently, their response to market uncertainty can help to indicate the scope of challenges facing the industry as a whole.’
While all respondents agreed that the US economy was experiencing a downturn and 68 per cent of professionals believed it would be harder to raise money in 2008, nearly 93 per cent are interested in raising more money, indicating that at the individual firm level, smaller private equity players remain confident in their competitive positioning and overarching investment strategies.
The survey focused on the impact on the business of the credit crisis, the fundraising climate, the most pressing competitive challenges, and the relationship between the economic environment and investment opportunities.
Nearly 93 per cent of participants who predict a severe downturn in the US economy expect the credit crisis to have a strong impact on private equity firms. Most respondents are doubtful about a quick turnaround, with nearly 70 per cent believing that the credit crisis will continue to worsen over the rest of 2008.
Nevertheless, almost all participants expressed interest in raising more assets for their funds, including 90 per cent of those expecting a severe downturn and 97 per cent of those expecting a mild downturn.
The survey found that 85 per cent of those expecting a severe downturn expected hedge funds to interfere with their efforts, but only 28 per cent anticipating a mild downturn agreed. Only 21 per cent of respondents saw more private equity funds being launched in 2008, and about 40 per cent of managing principals expected traditional loans to replace private equity investments among young or struggling firms.
‘Throughout their development, small and mid-market private equity firms have had to contend with competition from a variety of sources, including multi-billion-dollar global funds with strong brand recognition,’ says Tom Angell, principal in charge of the US commercial services group at Rothstein Kass.
‘To effectively compete against the private equity behemoths, many middle market firms have been compelled to carve out practices in niche markets, often developing a level of specialisation and expertise that surpasses that of larger counterparts.
‘These firms have deep and broad relationships within their chosen practice areas and are accustomed to structuring and executing transactions in challenging circumstances. For these reasons, small and mid-market private equity firms are perhaps even better equipped to capitalise on emerging opportunities in underperforming commercial services sectors, including real estate, retail and financial services.’
Rothstein Kass provides audit, tax, accounting and consulting services to hedge funds, funds of funds, private equity funds, broker-dealers and registered investment advisors, advising on a wide range of organisational, operational and regulatory issues through its financial services group.
The firm also advises on fund structuring both inside and outside the US, compliance and financial reporting, as well as tax issues from a federal, state, local and international compliance perspective. Rothstein Kass has offices in New York, New Jersey, California, Colorado, Texas and the Cayman Islands.
