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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
mailto:[email protected]:[email protected]