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    The evolution of private equity Vik Singh

    KDR Capital Inc. | www.kdrcapital.com

    The earthquake in the making

    September 2008 will go down in the

    pages of history as a month which

    ushered a structural change in thefinancial markets across the globe. The

    pillars of Wall Street came crumbling

    down as if they were made of sand and

    the US Federal Reserve overnight

    became the largest hedge fund in the

    world. The most troubling aspect of the

    meltdown was the abrupt halt in the

    credit market. The asset based security

    (ABS) fiasco not only wounded the

    valuations of blue chip companies, it

    also effectively removed the incentive

    and the ability of markets to lend

    money. Several players in the financial

    market were hit hard by this credit crisis

    especially in the private equity sector,

    where the firms have traditionally relied

    on leverage financing for blockbuster

    deals. Many firms even with substantial

    cash holdings were reluctant to enter

    into deals due to the scarcity of

    leverage financing. Some were even

    forced to withdraw and sell at

    significant discounts further

    compounding their misery.

    The much awaited response

    The continuing uncertainty in the

    financial market has initiated a massive

    structural change in the private equitysector. With the changes in the macro-

    economic fundamentals of the global

    economy, it is expected that the private

    equity sector will have to change its

    traditional form of thinking. The days of

    lopsided leverage financing have most

    likely seen their end with the private

    equity firms being forced to explore

    other sources of funds. Simple financial

    engineering or leveraging heavily

    against a companys balance sheet will

    be no longer sufficient to sustain the

    deals. In addition, with the drying up of

    the leverage market, private equity

    deals will get smaller and sharper. Club

    deals would also get more common,

    however; it would be difficulty to repeat

    the mega deals, which were so

    common in the recent past.

    To succeed the private equity firms will

    have to bring much more than just

    financial creativity. The firms in this

    sector will continue to invest in the

    buyout of public companies but will

    hold them for longer terms of period.

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    The evolution of private equity Vik Singh

    KDR Capital Inc. | www.kdrcapital.com

    They will have to actively participate in

    the acquired companies transforming

    their management culture by reducing

    cost and improving efficiencies. In

    addition, they will be required to

    formulate and successfully implement a

    dynamic business strategy in order to

    secure a successfully exit plan.

    Limited Partners, hedge funds and other

    institutional investors are expected to

    increase their participation in the

    private equity sector after having seen

    their portfolios diminish considerably due

    to the downturn in the public market.

    Sovereign funds from Middle-East flush

    with the recent spike in the oil prices will

    also be increasingly participating in this

    sector in order to improve their returns

    and add to the state coffer when price

    of oil softens as been currently

    witnessed.

    Certain groups in the private equity

    sector are expected to do better than

    others. There is a renewed resurgence

    in the distressed asset investment class.

    Recessionary forces have decimated

    several sectors such as the

    manufacturing and resource sector and

    several companies facing an imminent

    demise are turning to this area of

    private equity market for a rescue plan.

    The silver lining

    Despite the recent setback, the future

    looks good for the private equity sector.

    Fundamentally, there are three main

    factors that will continue to keep

    investment in private equity attractive.

    First, the emergence of developing

    markets such as India and China as

    global economic powers would offernew venues for growth in this sector.

    The opening up of the government

    sectors and the need for massive

    infrastructure overhaul in these countries

    will offer returns much higher than those

    offered in the traditional markets of

    North America and Europe. It will also

    offer the firms the much needed global

    diversification opportunities. Secondly,

    the private equity sector will continue to

    offer substantially higher returns than the

    average returns provided by public

    sector markets. With the erosion of

    portfolios of several limited partners such

    as pensions, many will be looking intoincreasing their investment in the private

    equity sector to make up for the shortfall

    in returns. Finally, the increasing

    regulation in the public market means

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    The evolution of private equity Vik Singh

    KDR Capital Inc. | www.kdrcapital.com

    that many companies, which have

    suffered from the downturn in the

    markets, will turn private in order to

    engage in far reaching restructuring

    activities, which might not be possible

    under active market and shareholder

    scrutiny. We will be making history and

    the evolution of this most important

    element of the financial world will be

    leading the way.

    Vik Singh, heads KDR Capital Inc.,

    a boutique advisory firm active

    across the whole spectrum of

    Business Services activities, and

    has specific experience in 3 key

    areas: strategic advisory, private

    equity funds in emerging markets

    and foreign direct

    investments. He can be reached

    at [email protected]

    mailto:[email protected]:[email protected]