A Better Year Ahead for Private Equity
With the dawning of a new year, 2013, comes the hope and anticipation that this will be the year that the private equity market experiences a stronger recovery compared to the anemic performance of the past several years. There is evidence to support that this year will see a healthy recovery in all aspects of private equity, with much of it concentrated in the small- and medium-size transactions.
The IMF recently revised slightly downward its forecast of global economic activity for the next two years. Even though emerging market economies are growing faster than advanced economies, they are growing at about two-thirds their previous peak real GDP growth rates. Austerity-battered Western companies are looking everywhere for growth,1 and in the U.S., capital expenditures and exports have accounted for about three-fourths of GDP growth since 2009.2 Despite the slowdown in economic activity globally, advances in U.S. technology applied to finance, manufacturing, health care, education, and security are continuing and provide strong support for private equity investment opportunities going forward.3 This is especially the case now that the “fiscal cliff” budget issues are being dealt with. Slower real GDP growth will encourage companies to continue to look for cost-reducing production technologies to build their price competitiveness. This is especially the case as Japanese and large emerging market companies are on a global acquisition binge in the U.S. In the Boston Consulting Group’s 2013 annual report on the top 100 “global challenger” companies, those from emerging markets, represent 17 countries (including 30 Chinese companies), including consumer-oriented companies such as financial services, e-commerce, health care, and agribusiness.4
The total value of merger and acquisition activity in the U.S. has been well below the peak levels during the mid-2000s. Even though there have been fewer larger acquisitions, activity among the small- and medium-sized companies has been robust and expanding. Opportunities for private equity have largely been in companies of this $25 million to $100 million size. This market has shown relatively strong growth, attracting both domestic and foreign buyers, and this pattern is expected to continue through 2013.
In this issue of The Journal of Private Equity, David Teten, Adham AbdelFattah, Koen Bremer, and Gyorgy Buslig, in “The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success,” focus on how venture capitalists can systematically help startups increase their odds of success, beyond simply providing more capital. Their study shows that the primary levers of venture capital to do this are team-building, operational improvement, strategy, skill building, customer development, analytics, and the venture capital firm network.
The next article by Darek Klonowski, “Private Equity in Emerging Markets: The New Frontiers of International Finance,” documents how and why emerging markets are becoming a major force in global private equity. In “Is Nordic Private Equity Different?” Robert Spliid concludes that major cultural, economic, and political differences between the U.S. and the Nordic countries make it difficult to apply American theories and empirical findings on the Nordic region.
Osei Van Horne and Susan örge, in “Impact of Group-Buying Models on Small Business Purchasing: Pilot Research Analysis,” examine the efficacy of group buying. A group purchasing organization’s ability to reduce the unit cost of goods and services is generally proportional to the buying volume it aggregates on behalf of its members.
The next three articles focus on issues related to private equity funding. First, Carlos Ferreira and Michael Patanella, in “PE Firms Find Quality Investors in Single-Family Offices,” indicate that most experts agree that of the more than 700 private equity firms in the market trying to raise new private equity funds, only a small fraction will be successful. Enter single-family offices (SFOs). Although SFOs are not new to the marketplace, they are playing an increasingly important role in the private equity fund-raising market for a couple of reasons. Second, Mike Hopkins and Donald G. Ross, in “Key Drivers of Private Equity Firm Certification at Initial Public Offering,” examine buy-side, financial analyst perceptions of the determinants of private equity firm added value. The findings reveal significant relationships between the attractiveness of private equity firms’ IPOs and 1) their reputations, 2) their level of retained ownership, 3) the duration of their involvement prior to the IPO, and 4) the interaction between duration and intensity of involvement. In the third article, “Private Equity Fund Raising in Nigeria—The Legal Requirements for Pension Funds,” Olubunmi Ogunkunle seeks to give general partners interested in raising private equity funding in Nigeria an overview of the legal requirements of fund raising, particularly as it relates to pension funds.
Jack Leung, in “A Systematic Risk Analysis of Listed Private Equity,” aims at dissecting the systematic risk of listed private equity (LPE) empirically through the decomposition of its beta. Instead of testing whether LPE is a good proxy of unlisted private equity, it intends to provide potential investors with better information regarding LPE’s systematic risk and a better reference to obtain relevant cost of capital when evaluating individual LPE firms. In their article, “The PowerShares Global Listed Private Equity Portfolio: Risk and Performance Analysis,” Kenneth Small, David Duncan, and Erika Small examine the risk and return characteristics of the PowerShares Global Listed Private Equity Portfolio (PSP) and the private equity asset class. Not only is the PSP more globally centric than the S&P PEI, the exchange-traded fund (ETF) structure provides for an explicit expense of management and administrative fees, and its returns may better replicate investable returns than those from an untraded index, such as the S&P PEI.
TOPIC: Private equity
F. John Mathis
Editor
ENDNOTES
The recently announced Dell re-privatization funded by Dell, Microsoft and Silver Lake supports this forecast although the large size may be an exception.
1Schumpeter, Economist, December 15, 2012, p. 70.
2“Global Economics.” Bloomberg Businessweek, December 17-23, 2012.
3“Briefing: Innovation Pessimism.” Economist, January 12, 2013, p. 21.
4Schumpeter, Economist, January 19, 2013, p. 68.
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