Time of uncertainty is time of opportunity for private equity

Kuala Lumpur, 28 October 2008

“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.”

Manjit Singh
Executive Director at PricewaterhouseCoopers Malaysia

PricewaterhouseCoopers' 2008 Global private equity report 2008 , "Seeking differentiation at a time of change", 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 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.

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.