PE going back to its roots

1970s-style operational improvements now a core feature of any investment says Partners Group.

Private equity firms are returning to the old-school investing approach of attempting to improve operational value for firms, as buyout companies trade at high multiples and global growth remains subdued. 

Swiss-based Partners Group co-founder Urs Wietlisbach says private equity is shifting to the industry’s formative 1970s style and new tech companies and other entrepreneurial start-ups are again in focus.

“We are back to the 1970s, where the main purpose of private equity was to create operational value – a 'back to the roots' approach,” Wietlisbach told AVCAL’s annual conference on the Gold Coast.

Private equity firms can no longer rely on a buy-and-hold multiple expansion strategy – they need to create value and take a company global or make other operational improvements, Partners Group managing director for Australia Martin Scott says.

Purchase multiples are near pre-GFC levels in the large cap end of the market because credit is so easy to obtain that little equity is needed for deals.

“The end result is leverag[ing] up more and this means they are more aggressive to get companies (especially large cap buyouts),” Scott says.

A “clear sign” of the next credit bubble in the US was the $US162 billion in covenant-lite loans made globally so far in 2013, already well ahead on the $US97 billion in the full 2007 year.  

“We are not seeing mega-deals yet but there are huge re-capitalisations coming in the next six to nine months," Wietlisbach says.

“It was as if the United States had never seen the GFC."

Separately, the firm is targeting emerging markets in South America – namely Columbia, Peru and Chile – but says China is overpriced and Russia too risky.

Wietlisbach believes the Chinese marketed has become saturated, with more than 10,000 private equity firms in China, compared to about 50 in 2003.

Many of those firms were inexperienced and are bankrolled at the behest of the State by local governments "who have no idea about private equity...which is why the prices are completely wrong, they are overpriced”, Wietlisbach says.

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