How private equity's adapting to the post-crisis world

In the new financial world that’s followed the credit crisis, private equity managers are providing valuable capital for growth businesses, while making sure that they’re fit for the more regulated, transparent environment.

 


Tightened regulation of private equity and increased tax scutiny

Governments are tightening regulation of private equity and increasing tax scrutiny. They’ve the backing of public opinion, which fervently believes the financial sector doesn’t contribute sufficient economic value to society. In Europe, the collision of Anglo-Saxon and continental European socio-economic models has fed criticism. But even in the US 2012 presidential campaign, the Democrats have questioned private equity’s socio-economic value.
 

Private equity's valuable contribution to economies

In this politically charged atmosphere, and as regulations and tax practices evolve, it’s easy to overlook private equity’s valuable contribution to economies at a time when capital is hard to come by. For instance, in Europe, private equity firms are funnelling billions of Euros every year into businesses while bank funding has become harder to access. According to the European Venture Capital Association:

  • Private equity and venture capital firms raised new commitments from investors of €40bn in 2011 for investing in European companies
  • In total, €45.5bn was invested in European companies during the year
  • 85% of the European companies backed were small-to-medium sized enterprises, and nearly half of them employed less than 20 people.

What’s more, the industry is becoming a pioneer of ‘responsible’ capitalism, establishing practices for others to follow. In a recent PwC survey, 94% of private equity respondents stated that they believed environmental, social and governance (ESG) improvements created value in their portfolio companies.1  Private equity firms are using ESG factors as a way to differentiate themselves and gain access to capital.

 

1Responsible investment: creating value from environmental, social and governance issues www.pwc/sustainability.com March 2012.
 

Seeking a balance between profitable investing & regulatory compliance

So private equity firms are adapting to the new environment as they seek a balance between profitable investing, regulatory compliance and demonstrating the benefits they offer society. Western governments are in danger of restricting an important flow of investment capital if they reduce the attractiveness of these private equity funds to investors. For example, sovereign wealth funds (SWFs) often invest in developed economies through private equity funds, making the sector a key conduit for investment from the fast-growing emerging markets of South America, Africa, Asia and the Middle East (SAAME), where almost 80% of SWF assets come from.
 

 

The International Finance Centres (IFCs) that host private equity funds are working hard to adapt – so that they comply with changing regulatory requirements and yet still offer an environment in which private equity forms offer a fair return to investors and benefits local economies.