Investment returns set to decline

15 November 2002

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An opinion survey of 42 private equity firmsrepresenting Â£12.3bn in managed assets suggesteda worsening of business conditions compared to thefirst ICOSR Private Equity Business Survey lastSpring. In particular , exit returns were reduced,failure rates continued at abnormal levels, newinvestment activity was lower and more effort wasdevoted to investment monitoring. There was asharp increase in agreement that acceptable returnswere compromised by the closure of IPO marketsand the M&A downturn. Despite these findings,private equity firms reported they were increasinglyoptimistic about the future. David Kipling, CEO ofICOSR, says that the trends indicated in our reportshow that a long-term change is needed in theactivities and management of private equity funds. Iffunds continue to suf fer from increased failure ratesand delays in exits then it is highly likely that furtherfunds will not be raised. These findings point to amisplaced confidence and a failure to recognise truepositions in performance and managementpractices . Kipling added, The circumstances nowexist where a VC may fail to achieve the hurdle ratespromised to its investors, and see no return for itsown efforts. In such circumstances, it is easy toenvisage that firms will start to consolidate evenfaster , or that team defections will accelerate.Kipling suggested that a critical dif ference betweensuccess and failure of funds was portfolio information management.A similar message concerning sliding private equitygains was issued last week by Amaury-Daniel deS?ze, CEO of PAI Management. PAI is France sbiggest private equity group with a portfolio ofÂ£4.2bn. De S?ze finds that Franceand Spain are providing new opportunities for privateequity groups as a result of large industrial sell of fssuch as Vivendi Universal. Regarding exits,however, he warns: the multiples we ve experiencedin the past are not going to bethe same .