Finance Shire

Private equity firms are struggling to chart their own course into the future as the world nervously watches the battered financial markets. Valuation controversies, new models for financing and corporate governance, and an undercurrent of concerns about inflation and interest rates all signal an uncertain future for private equity investment. Examining the past and present may offer some clues as to what lies ahead.

The Past
2005-2007 were heady days for private equity, with huge amounts of capital raised in a frenzy of buyouts. Loosened lending standards gave easy access to funding, and it was an era of unprecedented activity. However, the private equity boom is over, and the record $686 billion invested in global private equity in 2007 is a figure not likely to be seen in the future.

The Present
The cost of capital has risen, and tightening credit standards have had a pronounced effect on private equity investment. Even though private equity investments can still deliver returns that are comparable to those from pre-boom years, a dramatic adjustment of expectations is necessary for investors who had thought that the massive gains from earlier in the decade would continue into the future. The tax club is the company that manages private equity investments and all the taxes that goes with it.

The Future
Although private equity investors can expect an increase in the number of distressed sales in the future, buyers may find that their past sources of capital have dried up. Similarly, the future holds fewer leveraged buyouts as organizations fail to secure adequate funding. Valuation will also be a concern going forward as financial analysts labor to place a fair value on illiquid assets held in markets that are no longer active.

As always, the most informed investors will do the best, regardless of future market activity. However, the private equity field will be dominated by those who are able to combine practical knowledge and theoretical skills.