Private Equity Managers Looking At Diversification And Differentiation
Written by Writer on Wednesday, October 29th, 2008
Private Equity Managers Looking At Diversification And Differentiation
KUALA LUMPUR, Oct 28 (Bernama) — Private equity managers are now looking at diversification of their investment strategies and are seeking to differentiate their businesses during this time of change.
“Without doubt, we will see the industry reshape to adapt to the new order,” said Manjit Singh, Executive Director at PricewaterhouseCoopers Malaysia.
Investors, in the current climate of focus on quality, are seeking access to alternative investment managers with strong brand recognition that are seizing the opportunities and delivering returns in a transparent way, he said in a statement by PricewaterhouseCoopers in conjunction with the release of a report on “Seeking differentiation at a time of change”.
“We must not forget that uncertain times also bring great opportunities for the patient private equity investor and investments from this vintage are likely to generate high returns,” he said.
Manjit Singh said the private equity industry is witnessing a dramatic downturn in deal activity and is suffering from a lack of leverage caused by the turmoil in the financial markets.
This has a major impact on the ability to finance larger transactions but also creates lack of buyers for existing portfolio companies, he said.
He said private equity players will need to adapt to longer term holding periods by looking at how they create value for portfolio companies.
PricewaterhouseCoopers said among the key findings are the need for sustainable growth and diversification and examines the growing pressure on fair value accounting and mounting tax risks.
Shifting economic conditions are strengthening the motivation for building diversified stables of investment strategies but the report said this must be accompanied by appropriate controls, it said.
The current market climate means there is even greater logic in having a diversified product range as some asset classes are more suited to generating investment gains through the trough of the cycle than others, it said.
Private equity players are considering and implementing diversification of investment strategies in infrastructure, distressed debt and emerging markets, it said.
‘Sustainable growth will become critical as earnings growth becomes the primary driver of internal rates of return,” it said.
The report said operational expertise was critical in facilitating EBITDA (earnings before interest, tax, depreciation and amortisation) growth and “buy and build” strategies in fragmented industry sectors, it said.
Portfolio management teams will require integration expertise and there will need to be a recruitment drive to change the resource mix and transferring cutting edge Key Performance Indicators management trends across industries.
Fair value accounting presents real challenges for the private equity industry at a time when investors, regulators and auditors are demanding robust assessment of valuations, it said.
While there may be a high degree of internal and external challenges in the valuation of unlisted investments by private equity companies, investors will expect managers to demonstrate transparency in how assets are valued, it said.
As investment portfolios become ever more global, private equity houses are confronted with increasingly complex tax risks and structuring challenges, it said.
The new territories in which private equity companies have invested often have relatively undeveloped taxation systems while in the more developed economies, tax risks are increasing, it said.
Fund managers across the globe need to build and develop robust internal procedures to manage tax risk and to stay abreast of key developments in the territories in which they invest or deploy investment professionals, it said.
The report also showcases comprehensive global investment and fund-raising data for 2007.
In total, US$297 billion of private equity and venture capital were invested in the year, up 26 percent on the 2006 level of US$235 billion, it said.
Although the environment has changed dramatically in just a few short months, the historic data showed global buyout activity still growing in 2007, while expansion capital and high-technology activity had flattened, it said.
Similarly, while investment activity was growing in emerging markets and the United States, it was flat in Europe, it added.
– BERNAMA
