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Private equity to review its problems in Dubai

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private equity coverNext week delegates for the annual Private Equity World conference run by Terrapinn will gather again in Dubai with top regional practitioners leading the line-up of speakers for an interesting event.

But these are troubled times for firms with their borrowing capacity constrained, and business valuations sharply down albeit not to distressed levels. A $1 billion deal like the Bain Capital purchase of telemarketer Bellsystem24 in Japan looks out of the question.

Middle East private equity firms are in difficulty, as their own balance sheets are often now be full of assets currently worth less than they cost to acquire, and certainly worth significantly less than they had expected when framing their business plans.

At the same time the ability to leverage cash through borrowing has been severely crimped by the global financial crisis and bankers worried about getting their money back.

Leverage lessons

It was the leverage that private equity firms could apply to their cash balances that allowed them to take large equity interests, and achieve magnificent returns-on-capital-employed on exit just like their cousins the hedge funds.

Private equity requires careful and astute management, and the recession is sorting the good from the bad and ugly. Those firms that borrowed short and made long-term commitments that now need refinancing are in a particularly precarious position.

Being stuck with unwanted assets is a major issue. The former exit routes are often blocked. Initial public offerings have dried up in a world of shattered stock market confidence. Trade sales are more difficult because cash buyers are wary of spending while financing is tough to arrange.

So far in the Middle East there have actually been very few distressed asset sales. That has given the solvent private equity firms another headache: the lack of assets worth buying.

It seems valuations here are stuck between a rock and a hard place: banks are too afraid of soiling their own balance sheets to push businesses into a distressed sale; and owners are convinced that the good times will return eventually and cling to former valuations.

Something will change

Something will have to give way, and logic suggests that the marketplace will take a turn for the worse before it gets better. You do not have the worst financial crisis in living memory without business failures.

The law of the market jungle says that only the fittest survive. The weak that perish will leave assets that their bankers will have to sell at distressed prices to willing buyers like the private equity firms with cash.

Until that happens the best private equity firms will sit on their hands, not wanting to buy assets at prices that are still too high.

Of course, there are always willing buyers who get it wrong like all the regional private equity firms that bought into shipping just before the biggest collapse in global trade in history.

And let us not forget that another downswing in the global economy could leave some regional private equity firms as casualties of the downturn. Not everybody will be a winner in private equity either.

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Written by Peter Cooper

November 16, 2009 at 8:41 am

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