The Silver Lining

The last 18 months have been a dark time for private equity. Reduced deal activity and a mere smattering of exits have taken their toll on the resources and morale of even the most hardened of investors. As the seeds of recovery begin to raise their tentative heads and many prepare for their first exit since the downturn began, it merits thought whether investors still plan to implement the same exit strategies they used before market conditions deteriorated.

One could surmise that the longer timeframe of investments will have resulted in closer relationships emerging with management teams. Could this have led to a reassessment of what constitutes good exit practice - or even a slightly softer approach towards the disposal of companies?

ECI's Sean Whelan thinks not. The bottom line, he maintains, are the returns one reaps upon divestment. "The credit crunch has not fundamentally changed the way we think about exits. While we may have been holding assets for longer, the most important thing is that we maximise value."

He also disputes the idea that adverse conditions have had an effect on exit tactics. Despite ECI's creation of a team dedicated to portfolio management over the past few years, this has not distracted the firm from investing its funds, Whelan maintains, though it has dedicated more time to due diligence and assessing how businesses will perform in a less than buoyant market.

Another private equity firm with a dedicated portfolio management team is Investindustrial - which increased its resources in this department from 42 to 50 people in light of the economic situation. Partner Carl Nauckhoff admits that his company has used different strategies over the past year or so and believes that, if investors are not spending a lot more time managing their portfolios than previously, "they're doing something wrong".

Far from dismissing the possibility that the downturn has conferred certain advantages, Nauckhoff reveals that, in the case of Investindustrial's partial exit from helicopter firm Inaer to KKR earlier this year, the deal was partly achieved thanks to the firm's closeness to the company. The in-depth knowledge they had gained about the business - more than ever during the course of the past two years - enabled the group to run a quick, efficient process with the buyers, achieving promising returns.

"Spending more time with portfolio companies is definitely a good thing," he says.

For some it will be a comfort to know that the economic crisis which has claimed more than its fair share of victims has also provided those that remain with certain benefits. Only time will tell whether those firms which have devoted increased time and manpower to portfolio management will continue to do so once deal activity picks up again. It will be important then to remember - as it is now - that ill thought-out investments will remain just that, regardless of the amount of time allotted to nurturing them. As Nauckhoff concludes, "if you overpaid for a non-strategic asset, you can spend as much time as you want to on improving it - but it won't help you much."

 

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