Tag: emerging markets

Private Equity Survives to Fight Another Day

Posted on June 29, 2011

The private equity (PE) industry, like most others, took a big hit from the global financial crises. Yet, PE has rebounded and is in much better shape today than many analysts had projected. This better-than-expected position is thanks to relatively strong capital reserves going into the downturn and flexibility on the part of bank creditors that led to lower interest rates for PE investments.

Today, the industry continues to face challenges from the slow-growth U.S. economy, but it still sees a lot of potential opportunities in emerging markets, and in select industry sectors and asset classes – notably technology, mid-market companies and distressed companies.

Globally, certain emerging markets are considered highly attractive because their economic growth rates are likely to far outperform more developed countries. That has led PE and venture capital investors to focus on reaching vast numbers of new middle class consumers in China, India, Southeast Europe and Latin America. The top targets for investment there include companies in the Internet, financial services and clean technology sectors.

Technology more generally has been one of the few bright spots in an otherwise underperforming U.S. economy, and mid-market companies are especially attractive to PE investors now because they demand less capital than larger deals and have greater cash-out flexibility. Those are key qualities, given that fund-raising remains challenging as the economy tries to fight its way out of a long run bout of sluggish growth.

Another area attracting increasing PE investor interest: distressed companies, which had been hoping for better times but are becoming less and less able to wait it out. Troubled companies that have renegotiated bank loans six or seven times will need to resort to other, options with many turning to PE firms. Among the sectors most likely to provide distressed opportunities are real estate, finance and health care.

This all reflects the consensus at the most recent Wharton Private Equity and Venture Capital Conference, and the thinking is captured in greater detail in the just-published 2011 Wharton Private Equity Review.

Access the latest Wharton Private Equity Review and additional Knowledge@Wharton stories on private equity here:

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Private Equity Pushes East

Posted on June 22, 2011

Everybody it seems — from banks to corporations involved in consumer or business-to-business goods and services – is looking toward key emerging markets and Asia as the strongest areas of economic growth in coming years. You can add private equity firms to that list, too.

For these specialized investors, the booming economies in Asia and the developing world offer attractive investment opportunities – from health care to wireless technology, says Glenn Hutchins, co-founder and co-CEO of Silver Lake, a global private equity investment firm. He made the comments at the 2011 Wharton Private Equity and Venture Capital Conference, where he also added technology as a more general category for private equity investors to target.

“If you can position yourself in a growing part of the U.S. and the global economy, there is a very bright future ahead of you,” said Hutchins, whose firm has $14 billion in assets and offices in New York, California, Europe and Asia.

Despite that bright outlook, the economic drag of the financial crisis continues to make the recovery far weaker than those that have typically followed downturns in the U.S. and other developed parts of the world, Hutchins said. “Usually, the deeper down you go the steeper you come back.” But this time, the “bounce back is anemic by contrast.” Hutchins is a former adviser to President Clinton on health care and economic policy. He also is chairman of SunGard Corp., a software and technology services provider, and a director of companies including telecommunications provider MCI and TD Ameritrade Holding Corp.

The notion that recessions caused by a financial crisis tend to be much deeper and longer than the average recession has been documented going back a couple of hundred years by Carmen M. Reinhart and Kenneth Rogoff in their book, This Time Is Different: Eight Centuries of Financial Folly.

Looking five years ahead, Hutchins predicted the global economy will expand through 2015, with most of the growth coming in Asia and other parts of the developing world. Silver Lake is gearing up for this, he said. Employees are told, “You may not like the food. You may not like the jet lag. You may not like missing your kid’s soccer game, but you’ve got to go” to the emerging markets, particularly Asia. “Not only that, but we’re going to move you there.”

To read the full Knowledge@Wharton article about Hutchins’ views on the future of private equity and the global economy, see this article from the soon-to-be published, 2011 Wharton Private Equity Review: Battling Headwinds: Private Equity’s ‘Bright Future’ in Technology and Developing Economies.

And here is Knowledge@Wharton’s recent article on the economic outlook: The Economy: When Will Happy Days Be Here Again?

 

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India’s Private Equity Market Is Back

Posted on May 4, 2011

Foreign investment flows to India are on the rise as part of the general movement of capital towards emerging markets, the world’s growth engines of the future. And private equity (PE) is one area clearly picking up in India largely thanks to outside money, according to panel members at the recent Wharton India Economic Forum.

Although India’s overall economy barely suffered, PE investment in India took a big hit during financial crisis because of the blow that PE absorbed globally. Some 80% of PE funds in India come from foreign funds. As PE funds have bounced back over the last year with the world economy, many investors are focusing more on emerging markets with the greatest growth potential, such as India and Brazil.

While acknowledging solid potential gains for PE investors, participants on a panel titled “Private Equity: Investing in India – Getting Higher Returns” urged caution, most notably around governance, income tax and general regulatory issues, which remain huge challenges in India. Panelists also noted that India offers a fragmented PE market, often involving family owned businesses and minority stakes, and with little to no opportunities for leveraged buy-outs.

Mukund Krishnaswami, a founding partner of Lighthouse Funds, a PE company that manages $150 million in India, also warned investors to be “careful of betting big” on the things everybody wants to bet on. “The things you hear are hot today are not going to be hot in three to four years. What matters is what is in demand three, four or five years” in the future. “PE is about getting out” and so the question is, “can you return money to investors? The drivers today may not be the drivers in 2015.”

Krishnaswami recommends that investors be “opportunistic and cast a wide net.” Rather than focusing on one industry, PE firms should be generalists that try to take advantage of mega trends. For example, India is noted for its young population and huge trend towards urbanization. “But what does that mean for investors?” Not everyone is moving into the biggest cities. Instead, people from the country tend to move to tier 4-sized cities, and those in tier 4 cities tend to move to tier 3 cities, etc. “That is the shift,” Krishnaswami said. The trick is to know how consumer needs and aspirations differ at each level and to direct investments in a more nuanced way. Part of making successful PE investments in India will be “understanding what is the micro trend below the macro trend.”

Nevertheless, the maco trend in real estate looks like a good bet, said Gulbir Madan, founder and chairman of Brahma Management. “The big story is the domestic demand story.” There is a “huge demand for residential real estate that is just getting organized.” Anything with good management should do well, he added. More generally, investors should be prepared for “a long-term commitment.” Expect a “lock up of at least 10 years — everything takes longer than it should, and so investors must be extremely patient.”

Madan and other panelists also cautioned that pricing in the PE market generally in India has recovered from the financial crisis and is again on the high side.

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