The market for leveraged buy-outs has dried up forcing private equity firms to focus on growth capital and equity driven transactions according to an article by Robin Wigglesworth in the Financial Times. Wigglesworth believes the scarcity of credit is putting pressure not only on returns but also on the buyout model which is unsustainable and will lead to the disappearance of a substantial number of private equity funds.

On a more positive note, the article highlights that PE does have a positive impact on the performance of portfolio companies and the economy as a whole. PE firms believe their results are driven by a combination of financial and operational re-engineering as well as results-driven incentive schemes.

However, institutional investors have become more selective about their investments and are demanding more transparency, especially in cases where PE investments have not generated exceptional, risk-adjusted returns.

The article puts a spotlight once again on the relationship between GP’s and LP’s. It suggests that a change in the structure of the industry is needed to return to the growth pattern of the early half of the decade. Three key points were highlighted:

1) Managers should move from 'return profiling' to 'investor profiling' as different investors have different preferences.

2) Managers should focus more on operational and strategic improvements.

3) Managers should put more of their personal capital at stake.

The fate of the industry will be visible for all to see over the next decade. Much has been written about the role of private equity in the current financial turmoil and it is time for the industry to step forward and respond proactively to future challenges.

Source: Financial Times