Historic evidence suggests sector knowledge is key to performance. A recent study by BCG and IESE Business School found that “domain expertise” or industry knowledge was one of the three most important factors in determining private equity funds’ success in becoming a top quartile performer (alongside the ability to make operational improvements and a firm’s network). Understanding industry sector trends and developments; being able to win over the best management because you speak the same language; leveraging broad and deep industry relationships to avoid auctions; creating real value through intelligent business transformation strategies; all of these factors give the edge to funds that rely least on leverage and earnings inflation. But which industry sectors will fare the best during these tough conditions? Will some sectors emerge from the economic downturn even stronger?

Historic evidence suggests sector knowledge is key to performance. A recent study by BCG and IESE Business School found that “domain expertise” or industry knowledge was one of the three most important factors in determining private equity funds’ success in becoming a top quartile performer (alongside the ability to make operational improvements and a firm’s network). Understanding industry sector trends and developments; being able to win over the best management because you speak the same language; leveraging broad and deep industry relationships to avoid auctions; creating real value through intelligent business transformation strategies; all of these factors give the edge to funds that rely least on leverage and earnings inflation. But which industry sectors will fare the best during these tough conditions? Will some sectors emerge from the economic downturn even stronger?

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Even prior to Lehman Brothers (BL), Standard & Poors had declared they expected the number of defaults among European companies with higher risk loans to quadruple from 10 over the past year to 38 by June 09. More recently a leading distressed investor said that ‘in a few years we’ll reminisce…about how easy it was to take advantage of the bargains of 2009-10’.

While the overly leveraged ‘06 and ‘07 vintages are starting to create investment opportunities in good companies with bad balance sheets, loan-to-own strategies, even for significantly distressed companies with rapidly deteriorating earnings, have not seen the volumes expected. Trading in corporate debt is thin with senior and mezz still priced at discounts that are unattractive to fulcrum investors. It is therefore for the most part existing lenders who will increasingly be asked to choose between equity conversion or administration for troubled corporates.

Who will be the winners and losers in this new game of pass the parcel - and when will it begin in earnest?

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Financial commentators have been quick to note the impact of the global economic crisis on Central & Eastern Europe, but investors with a deep understanding of the region can point to several reasons to be cheerful; some CEE countries – most notably the robust economies of Poland, the Czech Republic and Slovakia - could even offer relative economic stability amid the current storm. In addition, since Western European companies will support subsidiaries with the lowest unit labour costs and most attractive growth prospects, CEE will return as Europe’s growth engine.

Weak exchange rates have also begun attracting foreign direct investment, as evidenced by Dell’s relocation of a factory from Ireland to Poland. Labour and product markets in CEE are more flexible than in many Western European states; public debt (with the exception of Hungary) is lower than the EU average; and the corporate sector is modern and competitive, as evidenced by the rising share of its exports in global trade.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Many secondaries are now trading at discounts to NAV of as much as 60-80%, particularly in relation to less attractive funds including venture, early stage funds and mega buyout funds. Current trading is thin and in some less attractive sub-sectors, mostly in the larger buyout space, we are seeing sellers offering to pay buyers to take on positions.

Limited Partners with long term allocations to the asset class have for some time over run commitment models, which allowed them to have enough capital in the ground even if there were substantial, regular distributions (which in the good times were the norm). For these institutions their commitments to private equity now represent substantially more than their targeted allocation, as distributions have dried up and the value of their public holdings have dropped. For some institutions private equity now constitutes well over 20-40% of their investments and many of these, including pension funds, endowments and family offices are in dire need of liquidity. Many funds of funds with an over-commitment strategy are also in difficulty as there are no distributions to pay for capital calls.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Optimism is a pretty rare commodity in the investment community these days. It’s probably a fair assumption that every Limited Partner is reviewing their investment strategy and portfolio more closely than ever before, and with as much attention to downside risk as to returns. But as the small print will tell you, past performance is no guarantee of future results. A fund that is used to delivering double-digit returns by investing in large end retail, for example, might find its investment strategy unsuited to the current climate. It may shift its focus to the mid, emerging, debt or indeed specialist markets in order to do deals. In doing so, however, it will drift out of its comfort zone and find itself in competition with more established players whose relationships and credentials are already in place. In that scenario investors might do well to lower their expectations or vote with their feet.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Data from the Insolvency Service show that company failures are up 56% from a year ago to a seasonally-adjusted 4,941.

It is perhaps understandable that the managers of these businesses have been caught unawares by the sheer rapidity of economic collapse; after all the entire banking community and the Government were similarly stunned. Sadly, however, the greatest danger to a distressed business lies in not acting quickly enough. Rapid cost reduction, replacement of debt with asset backed loans, forfeiting, debt for equity swaps; these are all tools of the private equity professional and forward thinking management. Acting early enough can make the difference between a business that survives and has the opportunity to thrive, and one that fails.

When the economy begins to turn, those businesses that are still around will be leaner and more tightly managed. They will be the engine room of a revitalising Britain. But they need to survive in the first place to be part of that picture. In a perfect world managers would take those business-saving decisions early enough, but more often they don’t and that’s when an unenviable set of choices are presented to them.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

A recent survey suggests that private equity will continue to benefit from investor appetite, but not yet. Mercer’s research covering more than 1,000 pension schemes with aggregate assets of €400bn (£353bn) suggests that 35% expect to introduce new investments in alternative asset classes. This is despite the fact they will have to crystallise losses in the public equity markets to do so and that, by some measures, shares currently represent good value.

For the moment however, investors are waiting for more clarity about where to invest. Investors put less money into private equity in the first quarter than they have done for almost six years. Two-thirds of investors are sitting on the sidelines and most are selling, not buying.

The relatively recent publication of year-end NAVs suggests that some firms will struggle to attract new money and Q1 reports, which will reflect earnings attrition as well as multiple attrition, will compound the effect. Further evidence from Boston Consulting Group, highlights the fact that investors are sure to be more careful in their manager choice in the future. In its recent paper BCG identified 4 criteria to watch out for in respect of GP survivability: historical performance, small remaining portfolios, low exposure to default prone industries and finally how much dry powder a GP has left. Their research suggests that only 30% tick the boxes on all four criteria.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

When George Soros speaks, people tend to listen. The prolific hedge fund investor famed for ‘bringing down’ the Bank of England on Black Wednesday and making himself a reported $1.1bn in the process has stated that the global economy is pulling out of recession.

“The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programmes are starting to take effect. The downward dynamic is easing,” he said.

Brave to call the bottom of the market? Soros is not alone in signalling we are on the cusp of an economic recovery.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

Life has rarely been tougher for AIM-listed companies: trading conditions are at their most challenging for decades, the cost of borrowing is rising on a near-monthly basis, bank managers aren’t cutting their customers any slack and for many share valuations are so depressed that issuing equity isn’t an option.

With low stock market prices and poor investor sentiment, delisting is an increasingly attractive option for smaller AIM-listed companies. If the key advantage of a public market listing, the ability to raise equity finance, is no longer available, management may just as well avoid the regulatory burden, expense and drain on operational resource of a listing.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

The year started with great expectations for significantly higher volume in the secondaries market. What has become apparent is that the spread between bid and ask remains too wide and that few trades are being completed. Year-end NAVs are right now being updated with March and June NAVs which will reflect earnings attrition in portfolio companies as well as multiple attrition.

Pricing in the market already reflects, to a great degree, diminishing performance among sponsored companies but vendors remain reluctant to trade. The expectation is that the next round of capital calls (already held back for as long as possible) may force some hands and that volume may start to be seen in the mid market as well in the larger buyout funds as we head further into Q2.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

In the current market where M&A activity overall has slowed to a trickle, the media / communication sector continues to present a wide range of good investment opportunities.

While the combination of a credit squeeze and declining earnings may well threaten the viability of some businesses, particularly in areas such as publishing, this extensive sector still offers great promise for those who can sort the wheat from the chaff. In particular, as media companies with onerous debt structures struggle to refinance there could be a flurry of M&A activity from strategic and PE buyers taking advantage of the opportunities on offer.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

In November 2008 the FT wrote that two-thirds of private equity bosses had stopped investing amid the crisis in financial markets, preferring to wait for the economic downturn to throw up more attractive deals. According to a survey published by the Economist Intelligence Unit, 220 GPs across Europe and the US said they were confident the markets would recover to pre-credit crunch levels within 18 months. We haven’t seen much movement on that position yet.

But while most sit on their hands the more ingenious players, including corporates, continue to find ways to invest. Frustrated and motivated buyers and sellers are beginning to find ways to get deals done using techniques and structures from the last economic downturn.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

While volume remains slow, public companies are still presenting attractive targets for PE. AIM offers particularly fertile ground as its development capital role continues to be compromised.

Companies particularly favoured include those with illiquid stock - ideally held by a few institutions plus management; an underperforming share price in an under researched/ out of favour sector; defensible earnings – long contracts/earning streams; and in particular companies that, with improved balance sheets, could capitalise on expansion opportunities, even in difficult economic environments through build up, additional revenue streams and overseas growth.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

At the tail end of last year the consensus was that M&A activity would pick up again around the second half of 09, once new pricing realities had been accepted by vendors. Crystal ball-gazing pundits suggested Q3 as the moment when motivated sellers might finally give up on pre-existing hopes for exit returns and backed up capital might start to find new homes once again.

So what hope is there that those crystal ball-gazers might be right? Are the pressures that might trigger M&A volume finally likely to get some release? Which businesses are likely to go first and who owns them?

For more on this please contact us at sarah.meyer@equusgroup.co.uk

* The Commission directive is expected to impose a significant burden on companies in general rather than just big businesses operating in the public eye.
* Under the draft European Union law any private equity group managing funds equal to or more than €250m (£226m) in total would be forced to disclose more information about its structure, strategy, and investors.
* The draft law would also force any company owned by an EU private equity group that had more than €50m of annual turnover, or an “annual balance sheet total” of more than €43m, to publish its finances, strategy and outlook every year.
* The BVCA has estimated that it would affect 500 to 600 UK companies, costing them £25,000 to £30,000 each to comply with it.
* The concern is that not only will it impose additional compliance costs, those companies will have to publish data compromising their competitive position, giving a completely unfair advantage to privately owned businesses not be subject to these rules.

Public scrutiny may also impinge, particularly at this point in the economic cycle, on those businesses having to go through the pain of restructuring, making it significantly harder for management to take the right, long-term decisions for the business. Precisely the problem that the public markets have so often had with rapid, dynamic and positive change for business transformation.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

A recent report* suggests the UK currently has the highest percentage of financially distressed companies in western Europe, as a result of its position as the leveraged buy-out capital over the past decade. This, combined with data from the rating agencies that predicts a compounding impairment of companies’ ability to repay debt, suggests that the ‘sticking plaster’ cures propping up many UK corporates may rapidly come unstuck.

The spectre of forced whole, or partial, change of ownership now looms very large indeed. For the most part, existing debt providers will be in the driving seat. There seems little evidence to date that distressed debt investors have been able to buy into the ‘loan to own’ opportunities anticipated at the beginning of the year.

Valuation has always been a key issue and some of those debt layers are pretty thin, so small changes to the way a business is valued makes all the difference for junior creditors. But for all parts of the debt ladder there is clear motivation to restructure existing balance sheets to allow for future survivability and even value regeneration. This is a real and critical question on dozens of stressed leveraged buy-outs as well as public companies. New structures are being deployed and owners are becoming increasingly creative in order to achieve this.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

How critical is the use of leverage to returns? Are there still good opportunities available for equity only investments? Or will companies with debt structures already in place become far more attractive acquisition targets? Which funds are likely to find banks more willing to lend to them: how much will this depend on reassurance on non-auction pricing, the depth and quality of due diligence and the ultimate success of their investment strategy?

For more on equity only deals please contact us at sarah.meyer@equusgroup.co.uk

With the new market value valuation rules coming into effect, investors are anticipating significant year end write downs. By some calculations, value reduction could be as much as 30 per cent, with others suggest the drop in value will be nearer 60 per cent. A further year-end report (Cogent) suggests 60 per cent of buy-out debt was trading at distressed levels with a high expectation the company will default within the next three years. The slightly theoretical argument surrounding GP 08 valuations is morphing in to one surrounding when secondaries volume will start, where trades are most likely to be seen and what the discounting levels to NAV is already being seen in trades in various sub sectors

For more on the outlook for the secondaries market please contact us at sarah.meyer@equusgroup.co.uk

Limited Partners are trying hard to maintain their allocation to private equity (Coller’s Barometer: more than three-quarters of investors said their allocation to private equity would stay the same (54 per cent) or increase (24 per cent) - unsurprisingly more than half of Limited Partners plan to cut their investment in the biggest buy-out houses in 2009. So, with the same weight of money needing to find a home but without the mega funds to suck it up, are mid market funds with strong track record of investing through numerous cycles part of the solution for the Limited Partner’s allocation dilemma?

For more on the outlook for LP allocations please contact us at sarah.meyer@equusgroup.co.uk

With the outlook both for private equity and the debt market more uncertain than for many years, the fact that secondaries activity market remains strong comes as little surprise. Traditionally secondaries are counter-cyclical to the primary market, since a downturn in the private equity industry often provides the motivation for investors to sell their assets via the secondaries market. As financial institutions in Europe and the US – in particular banks but also insurers and asset management companies – are being seriously downgraded, they are casting a keen eye over their portfolios, and that is helping to drive secondaries activity. In February CalPERS (California Public Employees’ Retirement System) sold a $3bn portfolio of private equity assets to a consortium of five secondaries investors, and where CalPERS leads, others often follow.

For more on the outlook for secondaries please contact us at sarah.meyer@equusgroup.co.uk

Remember the market chatter: how Private Equity was increasingly substituting the public markets, providing its own liquidity through the secondary market and increasingly targeting larger assets?

How life has changed. Perversely, at present, the absolute return measurement is under pressure as a result of news from quoted PE funds marking investments down – the big shout among the quoted group is about relative performance on a mark to market basis.

For more on this please contact us at sarah.meyer@equusgroup.co.uk

While the credit crunch is beginning to have an impact on Asian economies, growth rates remain far higher than those projected for Western Europe and the US for some time (example: China - median IRRs 07 67%).

Limited Partners increasingly understand the attractions of the region – a recent survey of European Limited Partners by Epiven found that 88% wanted to increase their exposure to China.

Additionally a recent KPMG report records significant increases in private equity investments in many of the region’s economies at a time when other areas are seeing sharp falls. India and China both saw increases of around 3% in investment values to $6.8bn and $5.8bn, respectively, in the first half of this year compared to H1 2007 figures, according to AVCJ. Korea saw an astonishing 225% increase to $1.5bn.

For more on the outlook for Asia please contact us at sarah.meyer@equusgroup.co.uk

According to Standard & Poors, European companies’ ability to cope with their debt loads is deteriorating rapidly. They expect the number of defaults on riskier loans to quadruple by next June 09.

The number of defaults on European leveraged loans will rise from as few as 10 over the past year to 38 by June 2009, equivalent to a rise in the rate of default from 1.55 per cent to 5.8 per cent. Even if they are right will that translate into catastrophe for Europe’s private equity and debt investors?

For more on the outlook for defaults please contact us at sarah.meyer@equusgroup.co.uk

With commentators vying for the title of ‘Most Pessimistic on the Outlook for the Economy 2009’, it would be brave to suggest that it’s not all doom and gloom. The prevailing lack of capital is clearly impacting transactions and investment generally; and as March 08 valuations start to replace previous valuations the stark fortunes of many PE portfolio companies will be revealed.

In spite of this Limited Partners are maintaining their allocations to the asset class, with a recent report suggesting over a third of Limited Partners are planning to increase their commitments to PE in 2009 (Coller Barometer). The challenge for General Partners is to ensure their investment model can deliver the attractive returns Limited Partners are looking for. Leaving to one side the issue of previous performance, investors will be closely scrutinising fund size and investment focus, with an eye to overall risk as much as potential returns.

For more on the outlook for Limited Partner allocation modelling please contact us at sarah.meyer@equusgroup.co.uk

According to a new study, far from being put off by the dramatic events in the market in recent months, the majority of investors remain positive towards private equity. More than three-quarters of investors said their allocation to private equity would stay the same (54 per cent) or increase (24 per cent); with an increased focus on new areas, such as special situations funds, which invest in distressed debt or turnaround opportunities and funds focused on developing countries. Unsurprisingly more than half of Limited Partners plan to cut their investment in the biggest buy-out houses in 2009.

The deepening economic crisis could see up to 40 per cent of private-equity firms go out of business within the next three years as their portfolio companies default on debts, according to one of the darkest outlooks for the industry yet published. According to a November report 60 per cent of buy-out debt is trading at distressed levels with a high expectation the company will default within the next three years. But further data suggests that the best returns are achieved post market corrections and that a well thought out strategy can still yield results even in these challenging times.

For more on the outlook for private equity please contact us at sarah.meyer@equusgroup.co.uk

At SuperReturn, the 12th International Private Equity and Venture Capital Conference, a panel discussing the outlook for private equity returns over the longer term suggested the following:

· The tough environment for deals is expected to continue even as far as the end of 2010
· All economic forecasts made so far have been too optimistic so it is reasonable to assume that it will get worse before it gets better
· In the meantime the focus for private equity firms will clearly be on exiting investments
· For private equity firms, value creation through operational performance is now a must not a preference
· Private equity firms that have made bad investments with the wrong capital structures may not survive
· Many debt structures may blow up but lenders may also forgive covenant breaches because they do not want to end up owning businesses
· There may be some management change at some private equity firms if performance is woeful
· The funds currently under management have a 10 year investment period so there is plenty of time for private equity firms to turn things around if it is possible to do so

For more on the outlook for returns, whether this cycle is different and which areas of the market will provide the most opportunities please contact us at sarah.meyer@equusgroup.co.uk

At SuperReturn, David Rubenstein, Co-Founder and Managing Director of the Carlyle Group spoke about the outlook for the private equity industry worldwide and what private equity will have to do to get back to health. The main points from his speech were:

· Limited Partners will back the best performing private equity funds and specialists with expertise in attractive niches
· Secondaries transactions will be made with heavy discounts to NAV and some Limited Partners will even pay to offload positions
· More than a few PE investing institutions will not survive
· Spectacular rates of return will be seen in 6 to 9 months following vendors' acceptance of the new pricing level
· A more measured approach will be seen and the industry will be the better for it
· Private equity will be seen as part of the solution by governments globally
· There will be an increased recognition that private equity in and of itself is not a cause of systemic risk
· The image of private equity will be improved if it is managed well and if the industry is seen as part of the solution for revitalising economies
· Private equity will be seen as the best absolute return model consistently delivering alpha
· Private equity will be increasingly less centred on the US and London

For more detail on this speech please contact us at sarah.meyer@equusgroup.co.uk

At SuperReturn, Henry Kravis, Co-Founder of KKR talked about the survival of the private equity industry. The main points from his speech were:

What is happening now?

* Currently the private equity industry is facing testing times as every industry in every economy throughout the world is being challenged.

* The private equity industry must now ask itself the following questions:
1. Are we able to manage our portfolio?
2. Does the basic private equity industry model still apply?
3. Can we maintain the trust of all our stakeholders?
4. Will we be able to raise capital in the future?

* The current situation is more than just a financial crisis, it is a crisis of trust. Investors have lost a lot of faith in the system but he expects that this lack of faith will be rebuilt in time.
* The recession will be with us for some time to come but the healing process will start in the United States.
* The capital markets opening up is key to global economies' ability to return to health. There are some signs this is already happening with the opening up of the market for non-government backed debt, high yield issuance now starting to be seen and commercial paper now also being issued.
* Right now the 3 main focuses for the private equity industry should be portfolio, portfolio, portfolio. An important part of this focus will be on increasing portfolio companies’ operational improvement as well as conserving capital, starting with the 100 day plan leading right through to exit.
* Investments are being run with an increasingly defensive outlook and making sure the best management team is in place to direct the business through this economic environment is imperative. Managers who don’t perform and have not proved to be value creators need to be changed quickly. Experience of economic cycles is paramount to weather these economic times in the best health possible.

What will happen in the future?

* There will be many great opportunities to arise from this economic crisis and private equity firms will need to be careful not to miss them among the general misery when they show their faces.
* The leverage model that has underpinned the industry’s success will not continue in the same way again, which means that private equity firms need to be increasingly creative to replace the leverage model. If the industry does not adapt it will become irrelevant within the capital markets.

Some of the options include:

1. Taking minority stakes in businesses and providing support to management teams
2. Investing in distressed debt with a view to gaining control of the equity
3. Corporate build ups through equity investing
4. Investing in mezzanine
5. Fixed income investments (corporate debt that has been marked down too far)
6. Infrastructure investing can provide equity type returns 7. Restructuring existing capital structures in portfolio companies as well as new investment companies

Concluding thoughts

* The over arching question for private equity firms when looking at a potential investment will surround whether they will be able to create value ex significant leverage.
* LPs want intense communication with GPs at this difficult time.
* Private equity’s flexibility on timing an exit is a huge advantage for the asset class in weathering economic storms. Over the last 30 years KKR held companies on average for 7 years before they were exited.
* Does the private equity business model still work? There is a clear need for the private equity industry to showcase its strength as a business model to society at large.
* One of the most important points to stress is alignment of interest. Both GPs and LPs take on risk and are motivated by success. Nobody reaps the rewards until investments are exited. The industry still has an incredible amount of firepower, $400bn has been committed to private equity worldwide and is yet to be invested.
* Most importantly, as an industry we all need to communicate what is happening to regain the trust of all stakeholders.

At SuperReturn, the 12th International Private Equity and Venture Capital Conference, a panel discussing the outlook for private equity returns over the longer term suggested the following:

* The tough environment for deals is expected to continue even as far back as the end of 2010
* All economic forecasts made so far have been too optimistic so it is reasonable to assume that it will get worse before it gets better
* In the meantime the focus for private equity firms will clearly be on exiting investments
* For private equity firms, value creation through operational performance is now a must not a preference
* Private equity firms who have made bad investments with the wrong capital structures may not survive
* Many debt structures may blow up but lenders may also forgive covenant breaches because they do not want to end up owning businesses
* There may be some management change at some private equity firms if performance is woeful
* The funds currently under management has an 10 year investment period so there is plenty of time for private equity firms to turn things around if it is possible to do so

So what will happen to returns?

* Porfolio diversification will give some protection to investors in private equity
* Some vintages, perhaps 2010 and 2011 are expected to be good
* It is reasonable to assume 300 to 500 basis points over public equity in a long term investment outlook
* Investors will want to know whether private equity firms relied on riding the multiples curve and relied on debt or did they genuinely change companies – LPs will back the latter
* Right now exit choices are limited
* The next 12 months will continue to be slow for exits

Is this cycle not different?

* The private equity industry will get back to high leverage but not for a long time, in any event the industry needs to get better at transformation strategies
* There is nothing wrong with riding multiple inflation but cannot be relied on to amplify future returns
* Private equity firms will be checking to see whether their incumbent portfolio company management teams are right for the job in this more challenging economic environment
* GPs who can’t put money to work in this environment may have to adjust the management fee downwards from the 1.5-2% they are widely set at
* Transaction fees on acquisitions and exits may also need to be adjusted
* The next two years should see great investments made for the private equity industry
* Ballsy deals without leverage or where debt is already in place will become more frequent
* Smaller and equity heavy deals with the plan to recapitalise the investment in the future will also become more prevalent
* The normal debt / equity mix will change, it is anticipated that 50/50 will be common for a near term

Which areas of the market will provide the most opportunities?

* Until the private equity industry sees consumer confidence return, it is very difficult to see which areas of the market will provide the best investment opportunities
* In their current form the debt markets represent unchartered waters
* Spreads in the senior market have never been so wide which suggests that while there may be great opportunities it remains very difficult to identify value
* The technical market issues have an effect on pricing but it is also difficult to estimate the effects of the recession on portfolio companies
* Distressed investors are playing two-thirds defence and one-third offence
* Distressed investing is a deleveraging process by nature but right now whole economies are in need of being delevered
* Private equity firms need to adapt but if they are heavily exposed to the wrong industries they may never raise a new fund however they must try to adapt
* In general, on historic performance, private equity does better in bad economic environments
* Good companies with bad balance sheets are not yet available but in time will provide good investment opportunities

While the current global economic downturn has seen large end deals drying up in the US and Europe, despite the economic difficulties in the West there is fierce competition to become a key player in the fast growing Asian region.

In recent months, financial institutions including Morgan Stanley, J.P.Morgan Chase & Co. and Deutsche Bank AG have moved heavyweight rainmakers to Asia where dealflow has scarcely been affected in anticipation of an acceleration of growth and deal activity in the region.

The mood of the region recognises that global financial difficulties may see growth rates in India and China shaving off even as much as 2pc but given existing 10pc p/a current rates the outlook remains positive.

In the absence in Europe of opportunities for the mega-buyout funds to put capital to work existing funds are increasingly targeting these territories.
In addition local funds are raising money at astounding levels. According to the Emerging Markets Private Equity Association a record $59 billion was raised by emerging market private equity funds last year, up 78% on 2006. Of this amount, almost half the fresh capital raised went to commitments in emerging Asia.

Financial institutions and private equity funds like Morgan Stanley¹s planned Indian private equity unit who are entering the market at this late stage may however find that it is more difficult than they had thought to break into this highly regionalised and idiosyncractic market. Those with a strong track record and heritage in the region will be better placed to take advantage of the market opportunity as they have already built up their networks and understand the complexities of investing in the region.

Barriers to entry that will provide obstactles to new entrants to the region are based around language, cultural understanding, regulatory issues; and an awareness that Asia is not one homogenous market but full of markets at varying stages of evolution (e.g. Hong Kong and Japan are very different from Malaysia and Indonesia).