8 February 2010
With the great and good of the private equity community gathering in Berlin this week for Super Return 2010, the industry finds itself on a threshold between a troubled last two years and the hope of a brighter tomorrow.
The last 12 months have been enormously challenging, with investments rare, fund raising tortuous and exits few and far between. Just last month the Centre for Management Buyout Research (CMBOR) released their figures for 2009 and revealed that UK buyouts fell to their lowest level of value and volume in 25 years.
Against this dark background another problem reared its head, this time from Brussels in the shape of the Alternative Investment Fund Managers Directive, placing further strain and uncertainty on an already challenged industry.
But we enter 2010, if not exactly in high spirits, then at least with a belief that the situation is showing signs of improvement. The UK has emerged, albeit barely, from the country's worst recession since the 1930s, and with buyout deals up in value by 48% in the last quarter of 2008 to £843m.
Obviously there is still a long road of recovery ahead, but all the indicators are there for those in the private equity industry to be somewhat more confident when attending this year's Super Return.
The question that will be sure to exercising minds there is 'what now'? Now that European private equity has been through its worst period in a generation, what happens next?
It is clear that the days of generating returns via high leverage and other forms of financial wizardry are largely behind us. Much talk has been made during the economic downturn of how new models of investment have to be adopted, how private equity has to change in order to provide investors with the superior returns it has long delivered relative to other asset classes.
I agree that it has to change, but it is not new models that we have to take on but rather a return to the past, a return to what private equity does best, striving towards operational excellence. Private equity is getting back to its roots - this means buying companies, investing in them, building them and improving them. Private equity's ability to take the long-term view is crucial as the world's economy enters a new period of growth. The operational and management skills our industry possesses - combined with the innovation and entrepreneurship supported by venture capital -can play a vital role in dragging the world out of the economic downturn.
There are already reasons to be optimistic, not least the seeming reopening of the public markets to private equity-backed companies. Last year ended with that rarest of things, a venture-backed IPO, when UK VC Balderton floated Italian online fashion retailer Yoox. This year has begun with a whole raft of businesses considering taking the plunge. According to research by Private Equity News published this week, there are 22 companies backed by private equity that are considering an IPO, including New Look, the UK fashion retailer owned by Apax Partners and Permira, which is set for a £635m listing.
As I have mentioned, a potential threat to this brighter future comes from Brussels and the proposed Alternative Investment Fund Managers Directive. Whilst we remain committed to it in principle, significant revision is required to avoid a fall in international investment and stifling of growth that Europe so badly needs right now. Ours is not a lone opinion - it is one shared by the European Central Bank, Jacques de Larosiere, the Turner Report, the G20 and last week by the Bank of England's financial markets law committee, which said the directive in its current form would create "significant legal uncertainty leading potentially to systemic failure and widespread market disruption".
The private equity industry has shown it is more than willing and capable of regulating itself. The creation of the Walker Guidelines in 2007 and the subsequent establishment of the guidelines monitoring group has been a significant success - in the group's second report in December, all British private equity firms that met the criteria conformed with the guidelines, as well as two non-BVCA members, Macquarie and PAI Partners.
What the industry needs to remember at Super Return is that private equity has a very real and very important part to play in economic recovery which should not be hampered by overbearing regulatory strictures. This is an exciting time for private equity, a chance for it to make a real difference to the fortunes of companies and economies across the world, but with opportunity comes vigilance. We have to ensure that we speak as one voice to be heard in the political and regulatory realms if we are to have any say in the shape of our industry in the future.
