TORONTO, Oct. 30 /CNW/ - A new report from PricewaterhouseCoopers (PwC)
highlights the need for private equity firms to diversify and differentiate
their businesses in these times of uncertainty and outlines the key challenges
the industry must address in order to respond to today's contracted markets.
The report, titled 'Seeking differentiation at a time of change', reveals
that larger funds are broadening their investment criteria and geographical
horizons. The holding period for portfolio companies is extending and private
equity managers are demonstrating active portfolio management with this in
"The private equity industry is witnessing a dramatic downturn in deal
activity and is suffering from a lack of leverage caused by the turmoil in the
financial markets," says Peter Dale, leader of the PwC Canada private equity
practice. "This has a major impact on the ability to finance larger
transactions but also creates a lack of buyers for existing portfolio
companies. Private equity players will need to adapt to the longer term
holding periods by looking at how they create value for portfolio companies."
Furthermore, according to Dale, "Private equity managers are now looking
at the diversification of their investment strategies and are seeking to
differentiate their businesses during this time of change. Without a doubt, we
will see the industry reshape in order to adapt to the new order. Investors,
in the current climate of focus on quality, are seeking access to those
alternative investment managers with strong brand recognition that are seizing
the opportunities and delivering returns in a transparent way. We must not
forget that uncertain times also bring great opportunities for the patient
private equity investor and investments from this vintage are likely to
generate high returns."
The report highlights the need for sustainable growth and diversification
and examines the growing pressure on fair value accounting and mounting tax
risks. It also looks at the opportunities for private equity in the BRIC
(Brazil, Russia, India and China) economies.
Shifting economic conditions are strengthening the motivation for
building diversified stables of investment strategies but the report shows
that this must be accompanied by appropriate controls. The current market
climate means that there is even greater logic in having a diversified product
range, particularly as some asset classes are more suited to generating
investment gains through the trough of the cycle than others. Private equity
players are considering and implementing the diversification of investment
strategies in infrastructure, distressed debt and emerging markets.
Sustainable growth will become critical as earnings growth becomes the
primary driver of internal rates of return. The report shows that operational
expertise is critical in facilitating EBITDA growth and 'buy and build'
strategies in fragmented industry sectors. Portfolio management teams will
require integration expertise and there will need to be a recruitment drive to
change the resource mix, transferring cutting edge key performance indicator
(KPI) management trends across industries.
Fair value accounting presents real challenges for the private equity
industry at a time when investors, regulators and auditors are demanding
robust assessment of valuations. While there may be a high degree of internal
and external challenges in the valuation of unlisted investments by private
equity companies, investors will expect managers to demonstrate transparency
in how assets are valued.
As investment portfolios become ever more global, private equity houses
are confronted with increasingly complex tax risks and structuring challenges.
The new territories in which private equity companies have invested often have
relatively undeveloped taxation systems while, in the more developed
economies, tax risks are increasing. Fund managers across the globe need to
build and develop robust internal procedures to manage tax risk and to stay
abreast of key developments in the territories in which they invest or deploy
"Since the report was compiled the trends identified have accelerated,"
notes Dale. "That being said it is difficult to imagine that anyone could have
anticipated the turmoil that the credit markets currently find themselves in.
In fact, in many cases the credit markets have essentially dried up completely
meaning that private equity funds must consider acting as both the equity and
debt financier to complete transactions with the thought that ultimately the
debt portion can be refinanced when more favourable conditions exist.
Ultimately there will be opportunities but Canada is not isolated from what
appears to be a significant worldwide slowdown in transactions."
The report also showcases comprehensive global investment and
fund-raising data for 2007. In total, some US$297 billion of private equity
and venture capital was invested in the year, up 26% on the 2006 level of
US$235 billion. Although the environment has changed dramatically in just a
few short months, the historic data showed global buyout activity still
growing in 2007, while expansion capital and high-technology activity had
flattened. Similarly, while investment activity was growing in emerging
markets and the United States, it was flat in Europe.
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