Private Equity Needs to Get Back to Basics

by: Markham Lee

Courtesy of the here is a look at the flow of investment into private equity funds over the past 6+ years:

(From "The private-equity industry is chastened but still alive

GIVEN the private-equity industry's dire track record of late, it is a surprise that it can raise any new money at all. Yet in the first quarter of 2009 investors handed over $46 billion, well below the dizzy extremes of the bubble, but still on a par with the levels of five years ago. Half of this was directed to buy-out funds. That might make some sense—these funds have historically performed better during bear markets, when they can buy companies on the cheap. Still, private-equity firms now have their work cut out to prove that they were not just another manifestation of an unsustainable debt bubble."

Graphic courtesy of

Overall I think the PE model of buying troubled companies, turning them around and then reselling them on the public markets/to new investors is relatively sound. PE firms just need to get back to the basics of looking for sound companies to buy, as opposed to trying to ink deals for the sake of doing deals just to beat out their competition, generate fees, etc. I.e. they need to get back to looking for sound investments, as opposed to chasing short-term gains.

Sources: "Flip-Flop" - April 06, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.