A record private equity fund raising year in 2005 and greater predicted for 2006 has intensified the spotlight on the private equity asset class. In 2005 M&A activity in the UK was dominated by private equity buyers, with them making up more than 50% of the total value of transactions during the year. The importance of private equity bidders in the M&A arena is expected to grow, a trend that will be reflected across Continental Europe. Given the swollen coffers of private equity firms and their ability and appetite to bid for increasingly large companies, they are expected to do more headline-grabbing deals this year.
But despite all the talk, activity during Q1 has been limited and in the UK, at least, private equity bids have fallen far short of earlier years and expectations for this one. And while some of the potential bids that have made the headlines, UK-headquartered telecoms provider, BT for example, have left many simply smirking at the apparent preposterousness (as well as questioning the wisdom of the sort of club set-up a deal of this size would necessitate) much of the talk seems to be simply that.
With many of the large deals that have actually materialised being scrutinised, politicised and subject to thwarting tactics; the furors surrounding DP World’s bid for P&O’s ports and Endesa’s bids from Gas Natural and E.ON being just two examples, private equity bidders are probably in no doubt that the road ahead could be a bumpy one.
But it’s not just in carrying out the business their investors pay them to that problems may arise. Private equity firms, with their typical 2% management fee – the highest across asset classes in the fund management industry, and increasingly large purse and regulatory bodies such as the Financial Services Authority in the UK taking an increasing interest in their activities (thanks to their increasing profile and that their investee companies employ some 20% to 30% of the UK workforce), are going to have to strike a fine balance if they are to keep their head below the parapet and avoid generating negative sentiment that could result in regulatory and other pressures that will ultimately harm their business. It will be a challenge.
In the past the national and pan-national venture capital associations have made a good case for national governments to support the private equity industry conducting studies to illustrate the positive impact that the companies private equity firms invest in have on the economies in which they operate. But it’s not clear that they are willing and capable of corralling their members to work together on creating and maintaining more esoteric things, such as a positive profile for the industry, or even that it is the job of the associations to do this.
Posting performance figures on individual private equity firms’ websites is probably not the answer, although some would have us believe it is, citing the lack of transparency around portfolio returns as a major concern given the huge inflow of money into the private equity asset class in recent years and the relatively high fees charged for managing that money. It could answer some questions, but ultimately, probably, will raise many others.
The time and effort involved in producing standard reporting and performance calculation guidelines in Europe and beyond was largely down to the fact that, in terms of posting performance figures, private equity managers were skinning the cat in more ways than one.