Report indicates tough times for PE ahead

Grant Thornton's global survey of private equity houses puts a damper on any positive sentiment in private equity. A total of 72% of surveyed GPs evaluated the outlook for fundraising efforts as negative and almost 20% of respondents rated the economic outlook for their portfolio companies as poor. Growth inhibits returns and diminishes capital reserves for new investments, while institutional investors re-allocate and cautiously manage their liabilities, complicating fundraising for all parties involved.

"This economy is creating the biggest divide between winners and losers," says Martin Goddard, partner at Grant Thornton Corporate Finance.

A fund manager's track record is of greater importance than ever, because many historical investors in European private equity had their disposable capital capped in the wake of the financial crisis and new regulation.

"The two most overused phrases in private equity are ‘we are different' and ‘we add value'. If you want to be successful in fundraising, you have to have the track record and to be able to genuinely prove that you have a differentiated model," says Paul Canning of HIG Capital Europe.

Certainly, Europe's position is unique from a private equity point of view. With a mature market and developed economies, but a fiscal and political crisis at hand, Europe is currently most easily associated with distressed assets. Looking back to the US, the situation is very different, Canning argues:

"The US in comparison to Europe, is awash with liquidity. The structure of the market is just very different and there's a lot more institutional capital to go around."

As the capital provided by institutional investors declines, there is a new breed of investors, such as family offices or foreign investors from other parts of the world, which European GPs can target.

"We found that Growth capital investing rung a particular interest chord with Far and middle Eastern LPs whereas buyouts remains the core interest to the European and US LP's," says David Whileman, partner and managing director in the UK for 3i.

Above all, the financial meltdown that began years ago with the US housing bubble has triggered a flood of regulation across the continent. A number of countries including Germany, France and perhaps most prominently Sweden, have reconsiderd their stance on carried interest taxation. Private equity is easy to crucify, because it is a business of a lot of money with a potential impact for the everyman person. The industry's reputation has not helped in this difficult economy.

"It is all about transparency," Mo Merali, said head of private equity transaction advisory services at Grant Thornton. "Creating value is about improving business and operations. But complicated processes are sometimes misunderstood as closed-up and opaque. On the other hand, there is also a lack of consistency of messaging across the PE industry, sometimes even within PE firms."

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