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Time of uncertainty is time of opportunity for private equity, says PricewaterhouseCoopers
NEW DELHI, 17 October, 2008 – A new report from PricewaterhouseCoopers highlights the need for private equity firms to diversify and differentiate their businesses through this period and outlines the key challenges the industry must address in order to respond to today’s contracted markets.
The report, titled ‘Seeking differentiation at a time of change’, reveals that larger funds are broadening their investment criteria and geographical horizons. The holding period for portfolio companies is extending and private equity managers are demonstrating active portfolio management with this in mind.
Bimal Tanna, India Leader for Private Equity practice, PricewaterhouseCoopers, said:
“Globally, 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 a lack of buyers for existing portfolio companies. Private equity players will need to adapt to the longer term holding periods by looking at how they create value for portfolio companies.
Private equity managers are now looking at the 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 in order to adapt to the new order. Investors, in the current climate of focus on quality, are seeking access to those alternative investment managers with strong brand recognition that are seizing the opportunities and delivering returns in a transparent way. 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.
While everybody is trying to make sense of the recent events, in the short term, the current turmoil is bound to adversely impact overall investment sentiment in India with private equity adopting a cautious wait-and-watch approach. However, in the medium to long-term, India will continue to be an attractive destination for private equity, with the Indian economy expected to clock higher growth rates relative to the mature developed economies.”
Private equity managers are now looking at the 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 in order to adapt to the new order. Investors, in the current climate of focus on quality, are seeking access to those alternative investment managers with strong brand recognition that are seizing the opportunities and delivering returns in a transparent way. 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.
While everybody is trying to make sense of the recent events, in the short term, the current turmoil is bound to adversely impact overall investment sentiment in India with private equity adopting a cautious wait-and-watch approach. However, in the medium to long-term, India will continue to be an attractive destination for private equity, with the Indian economy expected to clock higher growth rates relative to the mature developed economies.”
Among the key findings, the report highlights the need for sustainable growth and diversification and examines the growing pressure on fair value accounting and mounting tax risks. It also looks at the opportunities for private equity in the BRIC economies.
Shifting economic conditions are strengthening the motivation for building diversified stables of investment strategies but the report shows that this must be accompanied by appropriate controls. The current market climate means that there is even greater logic in having a diversified product range, particularly as some asset classes are more suited to generating investment gains through the trough of the cycle than others. Private equity players are considering and implementing the diversification of investment strategies in infrastructure, distressed debt and emerging markets.
Sustainable growth will become critical as earnings growth becomes the primary driver of internal rates of return. The report shows that operational expertise is critical in facilitating EBITDA growth and ‘buy and build’ strategies in fragmented industry sectors. Portfolio management teams will require integration expertise and there will need to be a recruitment drive to change the resource mix, transferring cutting edge KPI 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. 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.
As investment portfolios become ever more global, private equity houses are confronted with increasingly complex tax risks and structuring challenges. 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. 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.
Companies also need to consider the accompanying risks when expanding into BRIC economies, whether these are the fundraising and investment trends, the key legislative and tax considerations, or the structures utilised in each jurisdiction. The industry needs to have emerging market strategies and careful planning and due diligence will be essential.
The report also showcases comprehensive global investment and fund-raising data for 2007. In total, some US$297 billion of private equity and venture capital was invested in the year, up 26% on the 2006 level of US$235 billion. 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. Similarly, while investment activity was growing in emerging markets and the United States, it was flat in Europe.
ENDS
Notes to Editor:
About PricewaterhouseCoopers
PricewaterhouseCoopers Pvt. Ltd. (www.pwc.com/India) provides industry - focused tax and advisory services to build public trust and enhance value for its clients and their stakeholders. PwC professionals work collaboratively using connected thinking to develop fresh perspectives and practical advice. Complementing our depth of industry expertise and breadth of skills is our sound knowledge of the local business environment in India. PricewaterhouseCoopers is committed to working with our clients to deliver the solutions that help them take on the challenges of the ever-changing business environment.
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