Private Equity Briefcase

December 3, 2007

Damn The Torpedoes -- The Private Equity Industry is Under Attack!

A slew of headlines from well-respected media outlets would seem to suggest the industry is facing a public relations nightmare of ever-growing proportions: “Buyout companies slash jobs, research finds”, “Image is just one issue affecting buyout firms”, “Carlyle Group co-founder warns of private equity's future”, “Blackstone defends private equity role”, “Private equity a force for good”, “Buyout firms cry foul over image”, “Private equity firms to be asked to open up”,  “Business must be open, not in the shadows”.

There’s no question that US and European buyout investors are facing challenges on a number of fronts from union protests, potential tax hikes and terminated transactions to concerns over transparency and eyebrow-raising job cuts at portfolio companies. However, if new data from Russell Investments offers any guidance on the private equity industry’s outlook in the eyes of institutional investors despite the black eye image problem, the LBO business is still in relatively, relatively being the operating word, good shape.

The 2007-2008 Russell Investments Survey on Alternative Investing, which surveyed 326 institutional limited partners, noted that leveraged buyouts remain the most prevalent private equity transaction in North America, garnering 71% of commitments this year, followed by private equity funds in Australia and Japan that received 41% and 63% of commitments, respectively. Pension funds, endowments and foundations plan to devote a larger portion of their investment portfolio to private equity, hedge funds and real estate. Buyouts, it turns, are still the most popular form of private equity transaction but the days of the large leveraged buyout may be numbered.

“The private equity community witnessed enormous volumes of LBO activity over the past two years, but investors may have come to the conclusion that the best and biggest buyouts have already occurred,” said Jay Pierrepont, managing partner of Pantheon Ventures, in the Russell Investments survey.

Whether the big deals have already taken place is a matter of debate though this year’s credit market retrenchment is certain to make it harder to secure leverage for double-digit, billion dollar-plus buyouts in the near term. What is certain is the middle market will remain open for business, and U.S. mid-market corporate and merger executives are sanguine about the prospects for dealmaking in the mid-market segment over the next 12 months.

Nowhere is the attraction to mid-sized deals more apparent than in cross-border M&A deals, according to data gathered by the Association for Corporate Growth, Grant Thornton LLP and Eureka Private Equity. In the survey of more than 200 investment banking, private equity, law firm, accounting and consulting professionals sponsored by the above three organizations, almost 72% of respondents noted they were involved in cross-border M&A deals and 70% expect to be involved with at least one cross-border deal over the next 12 months.

Taking a cue out of the big LBO shop play book US middle market buyout groups, historically a group very focused on the US market place, are expanding their horizons across the border. For example, New York’s Sentinel Capital Partners keeps a close eye on Canadian, as well as US, businesses, when it comes to deal flow.

Despite all the doom and gloom in the headlines just how badly the buyout industry is doing is a judgment call or perhaps just a matter of perception.