The past two years upended what used to be a widely accepted status hierarchy within the investment profession. Boutique dealers occupied the bottom rung, then came bulge-bracket dealers, then hedge funds. At the pinnacle stood private equity funds.
Monday's Financial Times "Lex" column presents a condensed outlook for the once-envied PE industry - a sector that's been temporarily reduced "to a bunch of unemployed actors with plenty of talent, but no way to use it."
Three key themes are likely to emerge, Lex says. First of all, managers need to sell off some portfolio companies at a profit to convince investors the downturn hasn't broken their business model. "A buy-out manager is only as good as his last fund, so success is a prerequisite to convince future investors to hand over fresh cash." KKR and Blackstone have already started, and Permira is set to follow suit, the column notes.
The second theme is leverage - specifically, paying down or restructuring the roughly $400 billion of private equity debt scheduled to mature within five years. Negotiations in which PE firms try to convince lenders to ease covenants or extend maturities "will be a pointer as to who might go broke in later years," observes Lex.
The third theme is a power shift from manager (known as general partner, in the alternative investment world) to fund investor (known as limited partner). Lex cites an incident from last July as a bellwether: two big investors in a Norwind Capital fund blocked an acquisition. As a result, he says, "The industry's licence to shop indiscriminately was revoked. Investors are unlikely to reinstate it any time soon."
Private Equity in 2010 [FT]
More Brokers Flee Big Firms, Taking Investors With Them [WSJ]
Rumors Persist That Goldman Is Threatening War With City of London [ClusterStock]
Goldman Sachs May Leave London [Reuters]
Small fund, big $ [NY Post]
Hedge Funds Regain Some Swagger [WSJ]
Watson Wyatt Sews Up $4 Billion Merger With Towers [NY Times]