Monday, 8 December 2008

Private equity – a smaller role in future

Private equity is in real difficulty. A claim very likely to bring tears to the eye, I know. In the newspapers, we find out that Permira is returning some cash to investors. One investor in particular, a subsidiary, was heading for trouble without such a move.

But ultimately private equity's problems lie not with investors' change appetite, but lenders' drastically reduced demand for debt. And without debt funding, private equity's dominant business model in recent years has been made impossible. What is the point of having a mega fund if this money cannot be used to leverage billions out of lenders?

Funds are now going to back to the drawing board, trying to work out new investment strategies. They are likely to find profitable schemes in the future but maybe never quite so profitable (and significant) as taking many large public companies private and then using cheap debt to take out massive dividends. That was frothy, top of the market behaviour if I have ever seen it.

And you knew the scene was dead when the Gulf Sheikhs tried (and failed) to get a piece of the action.

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