Private equity's appeal

Stock markets are volatile, US and UK property prices are tumbling and one analyst after another is predicting an imminent ‘correction' in regional real estate valuations. It's all doom and gloom, right?

Maybe not, if the continued spate of private equity deals is anything to go by. It could be that we just hear about these deals more often than we used to, but it seems that every month sees a number of large private equity deals involving regional investors.

These deals aren't glamorous by any means and they certainly don't attract big headlines, but they show that private equity has emerged as a crucial part of regional investors' portfolios.

A recent look at the newspapers shows the wisdom of taking a diversified approach. Local stock markets tanked in August and were up and down throughout September, on the back of local corruption probes and the global meltdown. Meanwhile, Western real estate values are set to continue falling as a result of the so-called ‘credit crunch'.

This all suggests that private equity, now a part of many high net worth individuals' strategies, seems certain to stay that way. The market has responded with a host of products that offer an increasingly noticeable amount of scope and variety. A number of funds offer the opportunity to invest in emerging markets outside the Middle East, such as Pakistan, whilst others are focused on emerging sectors such as healthcare and bio-tech. Others take an opportunistic approach, assessing each potential investment on its merits.

Private equity can be a win-win for all involved. PE firms will generally talk of returns in the 15% per annum range, a respectable amount by any estimation. Also, because a fund's investments are spread across a number of firms, a couple of failed investments can be offset by successful ones.

For the companies receiving the money, the situation is also positive. Many pre-IPO companies typically run into problems because of lack of funds or management expertise. PE companies can help on both fronts, with big benefits for the wider economy.

For the investor, the timeframe of PE deals could be particularly beneficial in the current environment. Private investors will usually stick with a company for two or three years before exiting through an IPO or private sale. So as the global economy starts to slow down, PE investors have the comfort of knowing they have a set of maturing assets waiting to be cashed in at the end of the downturn.

David Ingham is the editorial director of ITP Business.


Volatility creates opportunities
A look at why regional markets have crashed and what investors can do about it.

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