theevolutionofprivateequity-12702749937255-phpapp01

8/3/2019 theevolutionofprivateequity-12702749937255-phpapp01

1/3

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.


2/3



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


3/3



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]

Documents

theevolutionofprivateequity-12702749937255-phpapp01