According to Financial Times reporter Henny Sender, private equity firms are facing significant challenges. Some portfolio companies are unlikely to fare well in a recession. Others are burdened by debt. Private equity kings did not count on having to "beg" (Sender's word, not mine) institutional limited partners for money. See "Capital Calls Are Tough for Institutions and General Partners Alike" for our January 18, 2009 comments about the cash squeeze for some fund managers. Click here to view Ms. Sender's comments.
A far cry from April 2007 when famed deal-maker Henry Kravis talked about the "Golden Age of Private Equity," this industry is about to get insult added to injury. In "Bill Aims for Disclosure by Private Equity," Wall Street Journal reporter Peter Lattman writes that the Hedge Fund Transparency Act will cover both hedgies as well as private equity funds with respect to "divulging the value of their funds and names of all investors. If you are a pension, endowment or foundation investment decision-maker, will you be comfortable with having your allocation to specific funds made known to the general public or will it depend on the reported performance?
Another hot button issue, likely to emerge again is whether carried interest - for both hedge and private equity funds - should be taxed at a higher ordinary tax rate. Lattman suggests that it may not make a material difference in the near-term if private equity funds do not generate better returns. He cites a Boston Consulting Group study that shows that issued debt for a large percentage of private equity portfolio companies is trading at distressed levels. In this same study, entitled "The Advantage of Persistence: How the Best Private-Equity Firms 'Beat the Fade'," authors Heino Meerkatt et al make a compelling case as to why private equity is "here to stay." The quest for institutional investors is to pick the RIGHT private equity firm which, on a risk-adjusted basis, is expected to outperform average public market returns. (Yes, we could wax poetic about efficient markets. A topic for another day?)