The evolution of private equity – Vik Singh
traditional form of thinking. The days of
The earthquake in the making
lopsided leverage financing have most likely
September 2008 will go down in the pages of
seen their end with the private equity firms
history as a month which ushered a structural
being forced to explore other sources of funds.
change in the financial markets across the
Simple “financial engineering” or leveraging
globe. The pillars of Wall Street came
heavily against a company‟s balance sheet will
crumbling down as if they were made of sand
be no longer sufficient to sustain the deals. In
and the US Federal Reserve overnight became
addition, with the drying up of the leverage
the largest hedge fund in the world. The most
market, private equity deals will get smaller
troubling aspect of the meltdown was the
and sharper. „Club deals‟ would also get more
abrupt halt in the credit market. The asset
common, however; it would be difficulty to
based security (ABS) fiasco not only wounded
repeat the mega deals, which were so common
the valuations of blue chip companies, it also
in the recent past.
effectively removed the incentive and the
ability of markets to lend money. Several To succeed the private equity firms will have
players in the financial market were hit hard to bring much more than just financial
by this credit crisis especially in the private creativity. The firms in this sector will
equity sector, where the firms have continue to invest in the buyout of public
traditionally relied on leverage financing for companies but will hold them for longer terms
blockbuster deals. Many firms even with of period. They will have to actively
substantial cash holdings were reluctant to participate in the acquired companies
enter into deals due to the scarcity of leverage transforming their management culture by
financing. Some were even forced to reducing cost and improving efficiencies. In
withdraw and „sell‟ at significant discounts addition, they will be required to formulate
further compounding their misery. and successfully implement a dynamic
business strategy in order to secure a
The much awaited response successfully exit plan.
The continuing uncertainty in the financial
Limited Partners, hedge funds and other
market has initiated a massive structural
institutional investors are expected to increase
change in the private equity sector. With the
their participation in the private equity sector 1
changes in the macro-economic fundamentals
after having seen their portfolios diminish
of the global economy, it is expected that the
considerably due to the downturn in the public
private equity sector will have to change its
KDR Capital Inc. | www.kdrcapital.com

The evolution of private equity – Vik Singh
market. Sovereign funds from Middle-East private equity sector will continue to offer
flush with the recent spike in the oil prices substantially higher returns than the average
will also be increasingly participating in this returns provided by public sector markets.
sector in order to improve their returns and With the erosion of portfolios of several
add to the state coffer when price of oil limited partners such as pensions, many will
softens as been currently witnessed. be looking into increasing their investment in
the private equity sector to make up for the
Certain groups in the private equity sector are
shortfall in returns. Finally, the increasing
expected to do better than others. There is a
regulation in the public market means that
renewed resurgence in the distressed asset
many companies, which have suffered from
investment class. Recessionary forces have
the downturn in the markets, will turn private
decimated several sectors such as the
in order to engage in far reaching restructuring
manufacturing and resource sector and several
activities, which might not be possible under
companies facing an imminent demise are
active market and shareholder scrutiny. We
turning to this area of private equity market
will be making history and the evolution of
for a rescue plan.
this most important element of the financial
world will be leading the way.
The silver lining
Despite the recent setback, the future looks
Vik Singh, heads KDR Capital
good for the private equity sector. Inc., a boutique advisory firm
Fundamentally, there are three main factors specializing in helping private
equity funds in emerging
that will continue to keep investment in markets raise capital in North
private equity attractive. First, the emergence America. He can be reached at
Vik@kdrcapital.com
of developing markets such as India and China
as global economic powers would offer new
venues for growth in this sector. The opening
up of the government sectors and the need for
massive infrastructure overhaul in these
countries will offer returns much higher than
those offered in the traditional markets of
2
North America and Europe. It will also offer
the firms the much needed global
diversification opportunities. Secondly, the
KDR Capital Inc. | www.kdrcapital.com