Prioritization of Private Equity

April 22, 2013

On March 5, 2013, the U.S. stock markets posted their highest marks since 2008’s losses, marking the numerical return of investment to its levels prior to the recent recession. One would think that the same activity of private equity is returning to previous levels as well, and a number of events seem to support that theory. For example, Dell Computers announced it will soon go private again, and the great ketchup maker, Heinz, was bought out by Warren Buffett’s Berkshire Group.

Many experts in the private equity field see a significant difference between where private funding is today, in 2013, versus where it was in the middle of the 2000s. That sort of talk actually means far drier sources of help and investment.

The general model of private equity involves private equity organizations consolidating individual investor money and then putting it into new ventures. The goal, of course, is to make the company grow and then sell it in a few years to take a significant profit. For their services, private equity firms involved keep a sizable share of the profits as well, rewarding them for their strategic moves with investors’ funds. The number of these venture funds that existed right up to 2008 were growing like ants out of an anthill.

However, when the 2008 recession hit, the investor money that supported private equity firms dried up. People panicked and took their funds out of PE firms, preferring to keep their millions safe in Treasury bonds and gold. Those firms that survived have also seen a drop in ongoing additional investment, making remaining cash flow tighter and tighter. As a result, private equity firms have no choice but to start prioritizing where their funds will go, often ignoring and turning down the considerations of many new projects that will fizzle without early support. These same equity firms will also be dumping less-than-stellar projects that are not measuring up to profit expectations. Again, the same kind of pullout of support has a debilitating effect on impacted companies. It is estimated by Business Week analysts and writers that 25 percent of private equity firms will see a contraction of market viability and loss of their own ability to function by 2018.

As the old saying goes, not putting all of the eggs in one basket is a smart way to do business. Larger private equity firms have protected themselves accordingly, diversifying into real estate, hedge funds, and other non-public market areas of investment. While this works well for these firms, it again means funding is being diverted elsewhere rather than supporting new projects and companies looking for growth opportunities. In the aggregate, the activity continues to drain significant private equity funding from the venture arena.

Private equity funds have to prove themselves again with good picks and high returns. This is critical to be able to attract future capital and keep equity funds alive and functioning. The same way that the 2000s heyday of real estate valuations has long since disappeared, so have the easy days of raising private equity – until results are proven again.


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