Double-dipping

In the much-hyped secondaries market, a lack of realisations could bring more action and less talk. Despite the industry's assertion that it will be awash with opportunities, comparatively few have come to fruition thus far. However, LPs relying on distributions to meet future capital calls could be forced to sell fund stakes, as deal activity might pick up at a faster rate than realisations (see LP insight, page 11).

For GPs, implications could include longer holding periods combined with expected lower IRRs when they do exit, as well as the potential need for further support of portfolio businesses, requiring both financial and human resources.

In fact, the Ernst & Young study found that 36% of investee companies have received further equity injections while 43% have seen a change in top management. Contrary to media headlines, these figures suggest private equity firms remain committed to poorer-performing businesses. But if predictions of a double-dip recession - the W-curve - holds true, how long can private equity afford to back faltering portfolio companies?

Over-leveraged businesses are worst hit, with a recent example being BC Partners-owned Dometic, which was taken over by the banks. Not an ideal exit route, but BC recovered its investment in full (see page 26).

For buyout houses that have seen their equity evaporate from the capital structure, terminating an investment can be the only way to cut further losses. The same holds true for investors that recapitalised currently ailing companies in the boom years. After all, sticking with a struggling business could imply throwing good money after bad.

Yours sincerely,

Rikke Lilla Eckhoff

Editor, Nordic unquote"

Tel: +44 20 7484 9824

rikke.lilla-eckhoff@incisivemedia.com.

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