Split LP universe

In November 2008, speaking at the Nordic unquote" Private Equity Congress, Thomas Wold was a qualified optimist with respect to future new investments. The downturn had hit the US markets hard, but Storebrand remained "neutral", as he described it. What worried him was the "business as usual" approach among private equity players: "We were concerned that GPs were still buying companies at 'yesterday's prices' instead of waiting to benefit from a drop in valuations."

It was not until Q1 2009 that Nordic unquote" reported a drop in deal activity, whereas deal volumes in Europe started its trickle in Q4 2008. The UK reacted to the downturn even faster - the entire industry came to a halt after the Lehman collapse in September 2008. "Although the UK economy was hit harder in the downturn than most European countries, the economy is more responsive and may adjust faster than the Nordic ones," Wold says.

In fact, Storebrand is exploring potential investment opportunities there. "It is definitely a region we are looking at now," Wold says. Indeed, the private equity division of the Norwegian life insurance company invests in funds across North America and Europe, with its home turf in the Nordics being a subcategory of Europe. "We give no special preference to Nordic funds in our international private equity programs," Wold explains. "But some of our early commitments were with Nordic funds, and we continue to have strong relations with these managers."

A split universe

Unlike most of the GPs interviewed in this column who claim all investments are treated as a first-time subscription, Wold admits that if one of their existing fund managers perform above or according to expectations, they would be more likely to do a re-up. "The exception is if we make shifts in our tactical allocations within the asset class, and the fund doesn't meet our target fund characteristics," Wold says.

Without a dedicated group of LPs, Wold believes GPs looking to raise new funds will probably need to be in the market for more than a year to reach target size. Some will not be successful. This holds true even when LPs are carefully starting to loosening their purse strings again. "In 2009 many had closed books," Wold says. "In 2010 I predict we will see a split LP universe: those with capital to invest, and those with none."

These are hard times, and not everyone can win. "We are coming out of a favourable period for private equity. One consequence was over-establishment of GPs. As conditions reverse, it is normal that some will cease operations."

Second chances

Storebrand aims to benefit from the current environment, and just completed its first secondaries transactions. With capital outflows for new investments increasing at a faster pace than inflows from exits, LPs will continue to struggle with the consequences of over-commitment strategies and target allocations, Wold predicts the secondaries market will continue to thrive - with more action and less talk - during the next few months.

Despite the fact some LPs will inevitably suffer losses, Wold's impression is that investors will remain committed to the asset class. In other words, it is not the end of an era; the private equity model is here to stay.

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• LPs
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