Challenging times

At the time of producing our second global report into trends and attitudes within the global private equity (PE) industry, we find it confronting numerous challenges. There is a need to capture a share of the burgeoning funds available from an increasingly vigilant and discerning Limited Partner (LP) community and to deliver best in class. All of this in an economic environment where growth rates are declining and, in some economies, have disappeared completely. Furthermore, the industry is also being repeatedly challenged by the increasingly negative perception of private equity in the public arena. Nowhere is this increased awareness and negative sentiment greater than in North America.

With the public more conscious of private equity and the industry high on the media’s agenda for a number of reasons, it is fascinating to see how private equity is responding and adapting to this new found recognition in its core markets and in locations where the private equity story is still in its infancy. Not only is private equity more aware of its public image and its increased regulatory demands, but the industry has become far more mindful of how it approaches fundraising and achieves the growth demanded by its investors.

For many, fundraising will be the defining challenge of the next 12 months. In what is already a highly competitive market, many private equity firms in the process of preparing for fundraising are compelled to give serious thought to what will attract LPs. LP churn is expected in the next generation of funds as the power shifts further into the LP’s favour. This is compounded by the fact that LPs are increasingly unconstrained geographically. They have many more options available and this enables them to wield greater power and influence.

By Martin Goddard
Global Service Line Leader - Transactions
Grant Thornton International

In last year’s inaugural report, we reflected on the key regional themes and issues for private equity. We noted that different markets each have their idiosyncrasies, challenges and drivers, but that there was evidence highlighting global convergence in terms of private equity practice. There remain some fascinating regional trends from this year’s results, which indicate that practitioners in North America have an increased confidence about their ability to invest, raise debt and generate returns, whilst MENA stands out as a region where optimism is at its highest and where we expect to see a marked increase in PE activity in the short to medium term. In contrast, Western European General Partners (GPs) anticipate continuing challenges in a local market, which is flat at best.

The search for growth

This year, the report focuses on how private equity firms are attempting to secure growth for their funds and their portfolio companies in a world where many economies are experiencing limited growth, if any at all. There is no doubt that globalisation is no longer the preserve of the largest multinationals. Companies of all shapes and sizes now need to be adept at looking beyond boundaries in the relentless pursuit of growth. Accessing international markets, businesses, investors, consumers and potential acquirers are now all fundamental strategies for PEs and their portfolios in order to exceed their returns objectives.

The on going financial turmoil in the West and creeping uncertainty in the sustainability of the economic growth seen in ‘emerging markets’, means that where some see challenges, others will see opportunities.

Many Western European and North American firms are restricted geographically by the terms of investment imposed upon them, albeit that there is growing evidence of PE support for the international development plans and growth of portfolio companies. Perhaps in the case of North American funds, renewed confidence in their own economies’ prospects is also a contributory factor to a less adventurous international strategy.

The recent news of the launch of a network between four leading European mid-market firms illustrates how firms are seeking innovative risk averse ways to access global markets without committing significant resource and capital.

This year’s report indicates that the majority of respondents from both MENA and BRICS are now seeking to access markets outside of their home countries in the search for growth through investment or by opening offices. With many exciting growth economies within their regions, in many cases there will be “proximity investment” into neighbouring high growth markets...

Read the full survey below (PDF 36 pages)