eFinancialCareers

Back in the halcyon days of 2006 and 2007, private equity funds were the ‘it girls’ of the financial services scene. In those two years alone, The Economist says funds bought companies with an enterprise value of $1.4 trillion. Everyone wanted to be their friend, particularly the investment banks, who both helped them raise the money to fund their acquisitions and advised them on whom they should be purchasing.

Needless to say, things are now very different. Since the start of the credit crunch in late 2007, private equity funds have found it much more difficult to borrow money for large leveraged deals. They have therefore spent a lot less time on their core business of identifying companies to buy, borrowing huge amounts of money against those companies’ assets, and then selling them on again.

The PE industry is facing up to a crisis. Large institutional investors are selling off private equity stakes, forcing prices in the down to “fire sale” levels. According to Bloomberg, US$100bn of private equity funds may now be available in secondary sales, a level that risks “overwhelming available pools of capital.” In other words, there is far more interest in selling private equity stakes than buying them. And that’s not good news for the sector.

A period of unprecedented pain is now expected for the companies that PE firms own as the global economic meltdown hits their revenues. Peter Jaffe, head of restructuring at J.P Morgan in London, said in December 2008 that half the buyouts completed in the past three years may well encounter problems. Companies are overleveraged, and the outlook for 2009 is poor, with credit no longer available anywhere near the way it was before.

And while an economic downturn can create opportunities for private equity firms to profit by buying companies at cheap prices, those investments often take years to turn around.

Click here for an explanation of the private equity sector.