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Walkers Philip Millward

Comment: Private equity on the rebound

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Philip Millward (pictured) and Julian Ashworth, a partner and associate respectively with Walkers private equity group in the Cayman Islands, argue that the environment is starting to look brighter for private equity, with fundraising becoming easier, dealmaking poised to rebound and exits becoming easier. But government tax and regulatory intervention remains a cloud on the horizon.

After 2009 ended up with the worst capital-raising environment for private equity for five years, along with a relatively sluggish buyout market, perhaps the best news for the industry is that things surely couldn’t get any worse.

Some promising signs at the start of 2010, however, suggest this is a year for cautious optimism. Improvements in both the economy and stock indices, along with a narrowing in price spreads and greater appetite from debt markets, has seen talk of a more active PE environment amid a string of deals and improved business confidence.
 
Although 2009 was a poor year for fundraising, Walkers’private equity group has noticed certain market trends developing that are likely to continue throughout the current year.
 
There appears to be a greater concentration of small- and mid-market funds (as opposed to mega funds) imposing achievable hard caps on fund size and specifying more focused sector and geographic investment guidelines. There has also been a noticeable increase in secondary funds, which enjoyed relative, albeit not stellar, success in their 2009 fundraising efforts.
 
A number of Walkers’ clients are working toward substantial closings in the first quarter, which supports a more positive outlook for capital deployment in the second half of 2010. What is even more promising is that some managers in the market are expecting to reach or exceed capital-raising targets of USD3bn to USD5bn.
 
Among the recently reported closed deals in the US, Boston-based Riverside Partners, the lower middle market LBO firm, announced a final closing of its USD406m Fund IV, which was significantly oversubscribed from the proposed USD323m launch target in April last year.
 
Also hitting the wires was the close of GCG Investors II, a USD122m mezzanine and junior capital fund from Greyrock Capital Group. Principals reported take-up from a diverse group of institutional limited partners in Europe and the US.
 
The uptick in sentiment does not appear limited to the US, with Abu Dhabi’s Gulf Capital in buoyant mood after closing its heavily oversubscribed Gulf Capital Equity Partners Fund II in February. Gulf Capital highlighted the global interest in the Middle East region from investors in the US, Europe and Asia, including sovereign wealth funds, financial institutions, insurance companies and pension funds.
 
Despite the relative resurgence in the fund formation market, GPs are still focused on assessing their existing portfolios with a view to restructuring weaker investments and exiting those that are benefiting from a rebound in the markets. Based on Walkers activity levels in Cayman, Hong Kong, London and elsewhere, coupled with our analysis of general market commentary, we have observeda number of evolving trends.
 
A recent survey of private equity managers from BDO points to a surge in investments, with the vast majority of firms surveyed expecting an increase in investment activity in 2010, driven by the“unprecedented availability of capital from private equity funds which needs to be invested.
 
While BDO expect the mid-market houses to lead the charge in 2010, other comments from some of the larger players (including KKR and Bain Capital) suggest that mega fund firms are also in good shape, having refinanced significant levels of debt, and that larger deals are also set for a comeback, albeit with lower leverage.
 
Secondly, as deal flow has started to return, the range of potential exit opportunities has widened, particularly with the bounce in global stock markets. As debt finance opportunities improve, a trade sale has become a more realistic option, particularly as many industries are undergoing a period of restructuring and consolidation in continued efforts to deal with the recent adverse conditions.
 
Thirdly, private equity and venture capital-owned companies featured strongly in a wave of final quarter IPOs as firms looked to release value from investments made over the past few years. This is a trend that is expected to continue over the first half of 2010, particularly in Asian markets such as Taiwan.
 
Finally, secondary directs may prove to be more prominent in 2010 if price spreads continue to narrow and funds either come to the end of their investment term or seek partial liquidity.
 
Against this backdrop, although the PE industry is keen to leverage off the gradual increase in confidence globally, no one is underestimating the potential barriers that may slow this resurgent growth as a result of governments seeking to impose new regulatory and fiscal constraints on private equity activity.
 
Many industry participants are wary of the various legislative proposals that may impact the way in which in PE firms operate, although as has been proven many times before, through adversity comes innovation. Those of us in the offshore world remain confident that our role as facilitators of global financial arrangements will continue well into the future.

 

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