Private Equity's Changing Landscape?

The Economist reports, One Careful Owner?:

Discounted prices, outdated models and a glut of inventory. Customers can tell plenty about the state of the auto industry while kicking tyres at a used-car dealership. The same is true for the second-hand market for private-equity stakes. What used to be a tiny part of the industry has flourished (see chart).

“Secondary” stakes change hands when investors, who typically agree to lock up their money for a decade, decide to sell early. Triago, a firm that arranges secondary transactions, reckons that deals worth $25 billion will take place in 2011, up by 25% from last year’s record.

Banks and insurers are largely responsible, since they need to sell their investments in private equity and free capital to comply with an onslaught of new regulations, such as Basel 3 and Solvency II in Europe, and the Volcker rule in America. Cash-strapped European banks are also eager to peddle their private-equity investments. In August HSH Nordbank, a German bank, sold a €620m ($1 billion) portfolio that included stakes in well-known firms such as Carlyle and KKR.

A flurry of secondary activity has been predicted for years. But until recently only the most desperate investors wanted to offload their stakes at rock-bottom prices. Transactions have picked up because sellers can now get better prices. Neil Campbell of Tullett Prebon, an interdealer broker, says that investors today can expect around 95 cents on the dollar for many of their stakes, compared with only 60 cents in 2009. Some assets have doubled in price in the past year.

Prices have risen because of a glut of capital that firms specialising in the secondary market, such as Coller Capital and Harbourvest, have raised to take advantage of the opportunity to buy. These firms aren’t the only ones shopping. Some pensions and funds of funds have begun to use the secondary market to invest in promising funds or regions.

Some say that the secondary market’s growth shows that institutional investors are becoming more familiar with private equity as an asset class—and are becoming more aware of its attractions. It helps that secondaries can be bought and sold more easily than ever before. But transactions in them are still more arduous to complete, not to mention more opaque, than other investments. Unlike face-to-face bargaining over a dodgy motor, deals are negotiated through an intermediary. Attempts to launch exchanges and derivative products, which would make for more transparent pricing, have not taken off.

Mathieu Dréan of Triago predicts that by 2015 the annual tally will be $75 billion-worth of secondary transactions annually. The struggles of the private-equity industry will partly fuel this growth. Buy-out firms bought too many companies at top prices. They must now wait until the economy improves to sell or float them and return money to impatient investors. Private-equity firms are now holding on to companies for five years on average, compared with three-and-a-half years in 2007. Some investors don’t want to wait that long to pocket returns. They are turning to the secondary market to hand in the keys for their old model and grab what cash they can.

And Reuters reports that private equity firms, facing shrinking asset values and tough financing conditions, are trimming staff in mature markets, but are also looking to hire in growth areas so that they deliver the returns investors seek:

Shrinking fund sizes, crisis in the euro zone and hopes for emerging markets growth are all redrawing the global private equity map, determining the locations and sectors in which buyout firms hire and fire staff.

The industry boomed last decade as investor appetite created ever larger pools of capital, allowing firms to expand and cast their nets further and wider for deals. But in the financial turmoil, many buyout groups are now retrenching.

"This is still an active jobs market, the industry is focusing on niche businesses and smaller transactions and looking for senior advisors to succeed where the deals are," said Todd Monti, who manages the global private equity and venture capital practice of headhunting firm Heidrick & Struggles.

The total capital garnered by private equity funds globally that have reached final close so far this year is about $240 billion, compared with $275 billion raised last year, according to market research firm Preqin.

The crunch has been most obvious in Europe, where a brief renaissance in private equity deals in the first half has stalled and the gloomy outlook is forcing some to reassess their approach.

Among the highest profile changes, TPG reshuffled its senior team in Europe, with co-head Philippe Costeletos taking a step back from daily duties and partner Matthias Calice leaving the firm by the end of the year.

But it is likely to be the satellite offices in European cities that come under the greatest pressure to close down.

"I think people are going to rein in on that if fund sizes shrink," said one private equity managing partner.

Vestar Capital recently closed offices in Munich and Paris as part of a plan to focus back on the United States. And struggling mid-market group Cognetas has shut its office in Frankfurt and will close its London office later this year.


In line with the wider finance sector, the private equity jobs market has been more robust in Asia, where firms are actively hiring even as they shed tens of thousands of jobs in other regions, thanks to the continent's economic resilience.

Buyouts in Asia-Pacific, excluding Japan and Central Asia, total $33 billion so far this year, up 54 percent from a year ago, compared with 9 percent growth in Europe and 36 percent in the Americas, Thomson Reuters data shows.

But there is a caveat. Language and cultural skills are key to new hires in Asia, as global and local private equity funds build teams to invest the capital flowing into the region.

"Limited partners are allocating a larger percentage of funds to Asia, and with that (private equity firms) are opening offices in the region," said Julian Buckeridge, managing director for Strategic Executive Search based in China.

In contrast with Europe, where satellite offices are coming under pressure, the capital flowing to Asia is allowing firms to create new bases in places such as Singapore to provide a springboard into Southeast Asia.

In October, KKR appointed former Singapore government minister Lim Hwee Hua as a senior adviser and the firm is expected to locate a deal team of three in the region early in 2012 - KKR previously covered Southeast Asia from Hong Kong.

With firms such as TPG Capital and CVC Capital Partners already well established in the region, Blackstone Group LP is also mulling an expansion.

"We are seriously thinking of expanding our presence in the Southeast Asia region in terms of people on the ground and investment focus," Michael Chae, Blackstone's regional head, told the Reuters 2012 Investment Summit this week.


The global shakeout will also create winners in the west. Buyout houses that have grown into private asset managers, such as Blackstone, KKR and Carlyle Group, are actively recruiting in areas such as credit investment and real estate.

This diversification, combined with the fee-based remuneration structure of private equity funds, has helped shield the pay of dealmakers from the economic headwinds battering the financial industry.

Incentive compensation in the U.S. private equity industry excluding carried interest is expected to fall between 0 and 5 percent in 2011, compared with plunges of up to 30 percent in investment banking and 45 percent in fixed income, according to compensation consulting firm Johnson Associates.

With competition for capital from institutional investors intensifying, major private equity firms are also ramping up their fundraising, increasingly bringing operations inhouse instead of relying on others for their marketing.

"Private equity firms used to raise money every five years, now they fundraise everyday. Good capital raising professionals are in strong demand," said Joseph Healy, who co-heads the private equity recruiting operations of Korn/Ferry International Inc.

For those unfortunate enough to find themselves out of work, or just looking for more job security, there are options.

Sovereign wealth funds and pension funds, with aspirations to do more deals directly and cut out the private equity middlemen, could gain as firms shed experienced staff.

"Some of those people may well be happy to be employed by a sovereign wealth fund and have a more conventional salary, knowing that there is oodles of money to invest into deals," said David Currie, chief executive of Standard Life Capital Partners.

Indeed, the most sophisticated institutions are bringing their private equity, real estate and hedge fund activities internally, and consolidating their external relationships, committing to fewer GPs.

Below, top private equity firms such as KKR, TPG, J.C. Flowers and Oaktree, converge in Hong Kong in search of deals and capital. WSJ's Alison Tudor discusses with Joseph Ferrigno, Managing Partner of AMCG Partners, direct investment firm based in Hong Kong.