Friday, March 5, 2010

The Road to Recovery and Private Equity

The private equity industry the world over is undergoing a radical change. The entire industry is still recovering from the worst recession in the last 3 decades. The speed of recovery however is different though in different in different parts of the world. The role that the private equity industry has played in this recovery is substantial.

The Role of the Private Equity Industry
For thirty years preceding this crisis, the private equity sector has achieved notable success in attracting investment and securing strong returns. Moreover, this success generally reflects a strong record of providing services highly-valued by the market, and many of the services could prove very useful in promoting an eventual economic recovery, including its success in identifying firms that, with changes, could achieve higher profits and providing those firms with new capital, advice and expertise, new management, internal reorganization, and strategic acquisitions or sales that increase these firms’ sales and employment. 

While this record has unfolded over a period of generally strong growth for the World economy, including the recent period of 2003 to 2007, the companies held by private equity firms have generally outperformed averages for their industries. The recent period provided particularly favorable conditions for private equity, including the availability of low-cost financing and rising profitability in most industries. These conditions are now decisively different. 

The financial crisis and deep recession have sharply reduced the availability of financing and most sectors face losses or sharply lower profits. One result is that the value of new global private equity investments fell precipitously last year, from $765 billion in 2007 to $234 billion in 2008.4 Despite these diminished dimensions and prospects, our analysis suggests that private equity can play a valuable role during recessions and early recoveries. 

This role arises from the core activities which produced strong returns during the recent period of low-cost financing and healthy overall growth: As the recession increases strains on many firms and reveals areas of weakness and under-performance, private equity expertise in focusing investments and organizational and strategic changes where they can produce the most positive results can prevent some firms from falling into bankruptcy and help turn around other companies which otherwise might languish through these perilous times. The World Private Equity Congress 2010 in 

Hong Kong on the 8th & 9th of April this year promises to be a platform to learn perspectives of the role that the Private Equity industry has played from from the major players who have a global presence. Thus giving us insight into the different functions the private equity industry has played that has led to economic recovery.

1 comment: