COMMENT: Despite criticism, buoyant mood prevails

nathan
16 February 2007

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Bigger funds, new supplies of capital from hitherto marginal players and growth of the market globally, especially in Central and Eastern Europe. If the results of a survey co-sponsored by Simmons & Simmons and Société Générale Corporate & Investment Banking are a reliable guide, it will be milk and honey all-round for private equity players in 2007.

Some industry commentators would do well to note the results of surveys such as this. Nothing points to a diminution of LP appetite, a credit crunch, a regulatory push or macro-economic event which would blow the good ship private equity off course. The 350 private equity professionals who took part in the survey have clearly been paying little attention to the scaremongers predicting the imminent demise of the industry.

The recent media commentary bemoaning the practice and scale of private equity is a symptom of its continued success. Private equity plays by the rules. It grasps the essence and nature of capitalism, channels it for maximum efficiency to create value (and wealth) and draws criticism as a result. It also attracts other investors. An overwhelming 75% of respondents believe hedge funds will be a more important source of capital and 50% expect them to provide greater competition.

Hedge funds, the original locusts, are encroaching on the private equity scene because of its success. This is good for the industry. Competition should be embraced as a growth driver, not feared. ‘Hedge funds are a useful addition to the market. They can fill an alternative slot, perhaps using different financial instruments to seize a less obvious opportunity’, Arthur Stewart of Simmons & Simmons believes.

It is true to say that private equity has something of an image problem, which must be dealt with. (see Cover Story, Private Equity Europe March) With 40% of respondents expecting to raise larger funds this year, bigger deals and thus greater media scrutiny becomes inevitable. We will also see more battles for public assets, as shareholders reject private equity approaches for fear of underselling. These shareholders may also see a better way forward for the business. ‘Shareholders are increasingly sophisticated and could interpret a private equity approach as a signal to implement changes to create further value,’ says Stewart.

Surveys such as this are a necessary reminder that for all the criticism, the private equity model remains more popular than ever. With GPs planning to expand further East, through Europe and into Asia, the critics are sure to have plenty of ammunition in the coming months.

By Nathan Williams