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Walkers predicts change in private equity market

Various developments in the private equity market over the past 18 months, including the growing role of sovereign wealth funds and the continuing influence of emerging markets, hold the s

Various developments in the private equity market over the past 18 months, including the growing role of sovereign wealth funds and the continuing influence of emerging markets, hold the seeds of significant changes for the industry in the future, according to Cayman Islands-based offshore law firm Walkers.

According to Walkers, the rising cost of leverage and in certain cases, the unavailability of debt finance, has meant that the old private equity model of firms using leverage to enhance returns is increasingly hard to replicate.

Increased competition from sovereign wealth funds, whose available capital is at an all-time high, is pushing private equity to revise its traditional model, Walkers partners believe. As sovereign investors continue to diversify their investment strategies by investing in emerging markets such as China and India and exploiting the fall in asset values, partly caused by the weak US dollar, private equity needs to keep up.

‘Private equity is entering a phase of ‘evolve or perish’ in terms of models and strategies,’ says Ian Ashman, head of Walkers’ private equity group. ‘As the global economy changes, private equity needs to adapt to keep attracting the capital that has traditionally gone to the sector.’

Part of the evolution involves embracing emerging markets including Brazil, Russia, India, China, the Middle East, Africa and Asia. Many leading private equity houses, including Carlyle Group and Cerberus, have opened, or in the process of opening offices in emerging markets.

‘There are a number of reasons to have a presence in these markets,’ says Richard Addlestone, a partner in the private equity group. ‘The obvious reason is to facilitate raising capital, but having an on-site presence also helps to source deals in the emerging markets.

‘We are seeing high growth rates of around 8 to 10 per cent forecast for countries such as China and India and Middle East states, compared with forecasts of at best 2 per cent for the US. Investing in emerging markets brings opportunities for high returns, reduces the impact of the credit crunch, and offers more opportunities to obtain debt finance without incurring prohibitively high costs.’

The changes in the private equity market are also demonstrated by significant acquisitions. For example, the Carlyle Group recently closed a USD1.4bn fund to buy distressed debt. Experts see this as a move by private equity investors to take advantage of bargain basement prices stemming the credit crunch, as banks attempt to dispose of debt to restore their balance sheets.

‘It is rumoured that firms such as Carlyle, TPG, Apollo, Blackstone and others are working on deals for distressed debt, most notably working with Citigroup to snap up USD12bn worth of Citi’s leveraged loans,’ Addlestone says.

‘These transactions show two things. First, they show the new world in which private equity is operating and what new opportunities are currently out there. Second, they show that despite the credit crunch, private equity still has significant capital to work with.

‘Carlyle also recently closed the largest equity investment ever made in France by a single private equity firm, its EUR1.1bn equity investment in telecommunications companies Numericable and Completel.’

Walkers’ private equity group advises US buyout and venture capital firms on fund formation, formation of alternative investment vehicles and all aspects of international leveraged buyouts and equity financing where the structure involves offshore jurisdictional advice.

The Walkers group, which comprises the eponymous law firm, fund services provider Walkers Fund Services and SPV and corporate services providers Walkers SPV, Walkers (Jersey), and Walkers (BVI), provides legal and management services to global corporations, financial institutions, private equity houses, capital markets participants, fund managers, and growth- and middle-market companies from its offices in Cayman, the British Virgin Islands, Dubai, Hong Kong, Jersey, London and Tokyo.

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