Private equity set to be public relations nightmare

"The trends that emerged over recent years have fundamentally interfered with the alignment of interests between GPs and LPs," commented Roberto Quarta of Clayton Dubilier & Rice Europe, speaking at what can best be described as a reflective EVCA Investors' Forum in Geneva.

The conference, which at its core is a coming together of GPs and LPs, could not be more timely. Though there is almost unilateral agreement that today's market conditions offer attractive investment opportunities, there is similar agreement that the problem remains access to funding. Most often discussed in terms of ability to raise debt to finance buyouts, in the medium-term the greater concern is in relation to the ability to raise new funds. "There is obviously going to be a shake-out in the industry," noted Andrea Bonomi of Investindustrial. "Probably around 50% of GPs should die but only around 30% will."

Such concerns have inevitably led to discussions regarding the power shift in favour of LPs, with fees obviously being a main topic of conversation. "Perhaps it's time for investors to introduce tied structures when it comes to management fees; there is room for creativity," suggested Harald Mix of Altor Equity Partners. But the constantly recurring theme was the notion that private equity as an asset class has to get back to basics. "Those GPs that survive will remember the basics of value creation they forgot during the boom years and showing this is the only way you are going to get money from LPs," Mix continued. But as Bonomi explains, this is easily said but not necessarily easy to realise: "Has the world changed? I don't think a lot of GPs out there have the skill set anymore to go back to the old model."

Moreover, persuading LPs about the benefits of the asset class is going to be much more difficult for the next generation of funds, as the current vintage is likely to provide a painful track record. Dressing this up as a learning curve may not be good enough - in Mix's words, "it's tough to put on new make-up."

"The next two years, as more private equity-backed companies file for bankruptcy, are going to be a PR nightmare. Talk is cheap; LPs are going to be more pragmatic in future and will want to see returns and evidence of real value creation," Bonomi concludes.

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