The private capital sector has been seriously affected by the current period of turmoil. This is not just the result of a crisis of both financing and profitability, but also a reflection of deep structural issues affecting the core beliefs of the segment.
The private capital landscape is undergoing significant change, caused by huge market losses at funds, substantial write-downs on portfolio companies and the virtual inexistence of new investments over the past 12 months, except for special asset classes at the distressed end of the spectrum. The traditional exit routes for investments are blocked. Investors in private capital, like large pension funds, are suffering liquidity issues of their own and, in consequence, have all but stopped funding the private capital sector. In addition, the sector is confronted with increased regulatory interventions. With all these factors driving change, the end-game is not yet apparent.
As an immediate consequence, the private equity industry is now focusing its resources on managing portfolio companies – which often means a fight for survival. The current market situation has forced many private equity companies to move quickly to implement financial and operational changes in their portfolio companies that will allow them to preserve value.
However, the longer-term outlook for the sector is not entirely gloomy:
- A need clearly remains for private capital to play an important role in the overall economy
- Private capital funds with a stable investor base, sufficient capital to invest and adequate performance are poised to prevail
- Private capital investors will use the demonstrated performance of funds in the current difficult times to decide where to place their bets in the future
- Market turmoil is beginning to depress prices for new investments to historically low levels – which represents an excellent opportunity for a new vintage of successful investments
- Sooner or later, leverage funding will return.
