One of the consequences of the present global downturn is the huge reduction in the activities of Private Equity funds. Mega buyouts priced at two digits time the EBITDA and based in glorious exits are certainly over: although information is not homogeneous among countries, it can be said that in mid 2009 the industry faces a situation with more funds than investment opportunities.
As usual in these types of circumstances, winners will be companies better adapted to the new environment. What does this mean for PE business? Among others:
1) Concentration of portfolios in companies and sectors well known for PE funds, in which they can contribute to create economic value in the operational aspects, either in house or with external support networks.
2) Reduce the role of financial leverage as a key value driver, and focus in mid-sized deals.
3) Use of their ownership expertise to invest in public companies through the so-called Private Investment in Public Equity (PIPE), helping managers of public companies to focus on shareholder value creation.
4) Find new investment opportunities, like banks and insurance companies, where balance between risk and reward may be positive, especially when risks coming from toxic assets are transferred to other entities (bad banks).
A recent paper published by McKinsey (McKinsey on Finance, Number 31, Spring 2009) states that:
Better (PE) firms have a great deal of opportunity for improvement, particularly in attracting partners with the right operating skills, getting a better balance between financers and active owners, adding people who have experience in downturns, and reviewing the current portfolio with the rigor traditionally devoted to new investments.
PE business model is still valid and only flexible firms will survive to this new economic scenario. As an example, the former financing arm of General Motors (GMAC) is now partly owned by PE firms.