Change is needed but undefined

Private equity firms across the globe will have to adapt to survive in the new economic climate, according to the latest research carried out by the Economist Intelligence Unit and commissioned by Celerant Consulting.

A survey of more than 220 senior executives across Europe and the US found that 96% of respondents believe the private equity sector will have to change owing to tighter credit lines.

Despite investment banks having effectively shut up shop for leveraged buyouts last summer, there is still little consensus as to what changes specifically are required.

The largest number, 20%, said that a completely different financing model would be needed to replace a reliance on large-scale leverage financing, which the survey said was accepted as a “thing of the past”.

A similar contingent, of 19%, believes that independence will be a significant victim, with consolidation within the industry itself. Surprisingly, only 17% said that private equity firms would intervene in their portfolio companies, a strategy that many mid-market and later-stage firms favour and one that the larger buyout firms are generally expected to have to shift towards.

More worryingly, 16% said they did not know what shape the transformation would take, suggesting that nearly a fifth of private equity houses have yet to get to grips with the new economic climate and are simply waiting for the situation to resolve itself.

Another familiar refrain for private equity executives attempting to find a way to deploy capital is to consider alternative deal strategies, as was the case with the Economist’s survey.

Almost half (44%) said they would be prepared to consider deals outside of their traditional sectors, while 42% said they would look at deals outside of their size range, ie, shifting down in deal size.

Again, a considerable number simply opted to do nothing – 66% said that they were not planning to invest in the current climate and were prepared to wait for more attractive deals, although it was not clear whether this was a change in deal financing terms, market sentiment or vendors bringing prices down.

Despite this, only 20% said that they were planning to scale back activity in the next 12 months, while a mere 2% intend to shed jobs – some have even suggested that hiring is still ongoing, as part of a continuing belief that better times are not too far away. About 53% believe the market will have fully recovered by the first half of 2010.