While the shakeout among hedge funds seems to have run its course, most private equity managers believe the worst is yet to come for their sector.
About 80 percent of 500 managers and firms surveyed by Private Equity News expect more closures and mergers among PE firms this year, according to The Wall Street Journal. Most believe consolidation will take the form of firms shutting down for inability to raise capital. The upshot: Expect fewer PE employers and fewer jobs by year's end.
Firms are being squeezed from two sides: Debt financing remains expensive, while institutional investors are reluctant to commit new cash. Ominously, neither condition looks to reverse soon. For instance, just 25 percent of respondents to Private Equity News' survey expect the average cost of debt financing to be lower this year than in 2009. About two-thirds said the impact of the credit crunch will be felt for "years" or that the PE market had changed "forever."
The easy money that drove the mid-2000s boom is gone, managers say. "The rules of the game have changed. The last few years have shown that the industry's stratospheric growth was the result of capital markets hosing cheap debt into private equity," Gresham CEO Paul Marson-Smith told the Journal.
Tighter financing means buyers must put more equity into their deals - 45 percent equity will become the new norm, David Rubenstein, managing partner of Carlyle Group, told the Journal. During the recent boom, PE firms often did deals with just 20 percent equity.
Where's the Silver Lining?
Not everyone in PE is pessimistic, though. Atlantic-Pacific Capital, which has seven capital-raising assignments currently under way, recently hired former Cantor Fitzgerald PE chief Christian Voss as a partner for its direct private placements group. Boston-based Riverside Partners recently raised $406 million for its fourth fund, including $81 million with APC's assistance.
There are other signs of hope, albeit tentative. Last month's PE-sponsored M&A deal value climbed 46 percent compared with January 2009 - although still 80 percent below the same month in 2006 and 2007. Private Equity News' survey found optimism in the mid-market niche, for which 75 percent of respondents predicted they'd be more active this year than last. And political and financial pressure on banks to divest their own PE and merchant banking businesses promises to spur a surge of secondary market deals.