Looking for opportunities

It just wouldn’t be a downturn if the word ‘opportunity’ wasn’t bandied around by every private equity GP in the business. GPs throughout the world are responding to the economic crisis by focusing on potential investment opportunities and hoping that investments made in the current market will be as bountiful as those completed in recessions gone by.

A new report from auditing giant PricewaterhouseCoopers confirms that resounding theme of hope and says that the current time of uncertainty is in fact a time of opportunity. The report entitled, ‘Seeking differentiation at a time of change’ offers advice to private equity firms by instructing them to diversify and differentiate their business in order to get through the current economic woe.

Among the key findings of the report was the need for sustainable growth and diversification and examines the growing pressure on fair value accounting and mounting tax risks. The holding period for portfolio companies is extending and private equity managers are demonstrating active portfolio management with this in mind.


For Jon Moulton, founder of mid-market private equity firm Alchemy Partners, the big opportunities in private equity lie with forced sellers of good assets that will require fresh equity.

Co-founder and managing partner of private equity partnership Palamon Capital, Louis Elson agrees and says: “Firms that have resources can bet on something they think will happen that no one thinks will happen and do very well. It will come down to who has the resources, not just money. It will be about who has the professional base to engage with companies that are going down.”

Many have already taken the advice of PwC and have begun to diversify their strategies by considering investment strategies in infrastructure, distressed debt and most notably the emerging markets, but Moulton is quick to warn that emerging markets, although once thought to be a safe bet, have little immunity to the market conditions.

He hones in on Eastern Europe and says: “The economy is going to slow down sharply because banks there are typically messy. There will be reasonable opportunity for distressed assets in those markets but not proportionately better than Western Europe.”

Thierry Baudon, managing partner of private equity firm Mid Europa Partners that focuses on buyouts in Central and Eastern Europe (CEE), offers a more optimistic viewpoint: “Although some countries in CEE are heading into recession, the region will be somewhat resilient compared with Western Europe.”

But Elson, like Moulton, is sceptical. He views opportunities in the emerging markets and cleantech with caution. He believes that there is still a lot of fear among investors as everyone is scrambling to find a safe harbour. “Although governments are looking more and more to cleaner technology, it is yet another bubble that will inevitably burst and cause a lot of casualties. There will be cleantech opportunities which will mean some winners and a lot of losers,” he says.


But the big questions remain on the minds of many private equity GPs and LPs, how do you value something? How is it going to perform? “Regardless of whether a firm is cash rich or not, these are tough questions,” says Philip Buscombe, CEO of UK-based private equity firm Lyceum Capital. “Larger companies are still somewhat cautious about acquisitions in the current environment. They are taking a long time to determine if they are going to do something strategically or not.”

As the bad times roll, it is becoming clear that there are very few safe bets out there and to make money, you need a fat chequebook and a hard stomach. For Buscombe the real opportunity for the private equity industry lies in learning from the current catastrophe. “It is an ideal time for the industry to reinvent itself. In periods like this, it is difficult to make money so often people make new business models. Everyone is much more innovative looking at new ways to make money, so we could create some real change in businesses despite the fact that it is difficult.”

For the future many agree there is a silver lining to be found. Baudon explains that the industry can get back to growth levels of 2006 and 2007 but it must return to its roots. “Private equity needs to go back to what it did best, which is to provide operational value to companies,” he says.