PE Remains Attractive, Industry to Sidestep Major Cutbacks
Despite fallout from the credit crunch, private equity remains attractive. That’s according to a new report from the Boston Consulting Group (BCG). Regardless of a recent rash of bad publicity, BCG says the asset class is just not as gloomy as it seems. Two reasons behind the optimism: the fact that private equity firms are focusing more on fundamental value and capital (though more expensive) remains available.
Meanwhile, although economic concerns are fuelling fears of layoffs, a new Private Equity Analyst (subscription required) report contends that the private equity industry will not face significant cutbacks. In fact, the report states that private equity firms have traditionally operated lean organizations, thanks to their management fee- and carried interest-based model, and simply can’t afford massive layoffs. Executive search firm, A.E. Feldman, notes that in the future, some key skills that will differentiate top candidates are industry-specific expertise as well as networking access to industry insiders. Moreover, a recent report in the Chicago Tribune states that amid the pullback on megadeals, law firms are trying to strategically enhance their corporate practices in anticipation of the next round of leveraged buyouts.
Investors Still Boosting PE Targets
Capital is plentiful worldwide, despite the fact that U.S. banks have tightened credit, according to BCG. A new report released by the firm states that capital continues to flow into private equity. Large U.S. pension funds in particular (including the $114 billion Teacher Retirement System of Texas and the $243.6 billion California Public Employees’ Retirement System) are boosting their private equity allocations - even as returns from these asset classes seem poised for a downturn.
In the past several months, California Public Employees’ Retirement System raised its target to the asset class to 10% from 6%, Oregon State Treasury raised its target to 16% from 12%, and Washington State Investment Board elevated its allocation to 25% from 17%, according to data complied by Private Equity Analyst. This comes as investors see the inherent risk of PE investing as being offset by the diversification away from stocks and bonds.
Meanwhile, BCG notes that new categories of investors are also showing up, namely sovereign wealth funds (SWFs) armed with huge pools of capital. For example, in 2007 the government of China acquired a 10% stake in Blackstone and Abu Dhabi’s sovereign fund bought a 7.5% stake in the Carlyle Group.
PE Can’t Afford Cutbacks
Regardless of how rough things get, BCG says PE firms will be cautious about cutting back staff. The report contends that tough times place even more demand on fund managers - not less. “Deal-makers have to spend more time scouting for deals and conducting due diligence; operating partners have to devote more attention to portfolio companies; and fund-raising experts have a harder time coaxing dollars out of limited partners. Cutting too many employees could cripple firms.”
Bottom Line
BCG concludes that private equity remains attractive because investments in the asset class have a strong likelihood of outperforming the market over the long haul.
