Bottoming out: enter the W-curve

05 May 2009

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unquote" is not brave enough to call an upturn in the market, but there are increasing signs that it's not far off. This issue alone sees nine funds closed for a total of $22bn: at least two exceeded their targets and one was oversubscribed - very different to the last few issues, where GPs were closing after long, drawn-out fundraises, and below their targets. What makes these different is their scope: half the sum raised is earmarked for secondaries, nearly half for energy (the $9bn First Reserve fund - notable as the one that fell very short of its $12bn target) and 10% for distressed assets

Furthermore, for market sentiment to get any worse looks impossible, which by definition should imply growth. The latest unquote" Q1 2009 Private Equity Barometer, produced in association with Candover, shows activity at its lowest level since 1996, with just EUR4bn clocked up in Q1. It's not just large deals affected, either, since the number of deals stands at 1998 levels (see page 24). But any recovery is likely to be drawn-out, not the V-shaped uptick so glorified by some politicians trying to sugar-coat the economic situation.

All this means a shift in the industry - not just in deal sizes, but also what the model looks like. The 10-year limited partnership model may no longer be ideal for the new paradigm, so think the plethora of investors piling money into secondaries. That restructurings and turnarounds will increase in popularity is not surprising, though it is likely to be a blip indicating the end of the cycle rather than a permanently significant feature of the asset class. Finally, some (many) J-curves could be renamed W-curves as many assets' climbing valuations prove false dawns and suffer further setbacks.

Yours sincerely, Kimberly Romaine, Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.