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Private Equity : back to basics
December 1st, 2008.
The financial and economic crisis that began in the summer of 2007 is -in its magnitude- one of a kind for today's leaders. But from the financial world to the real economy, the reference to 1929 is not relevant as countries have shown their determination to prevent a systemic crisis.
From Wall Street to Main Street, all players have benefited from the excessive credit growth of the past few years. Subprime loans have indeed helped finance the construction of houses. But we have now entered a period of great uncertainty due to the disappearance of the financial instruments designed to circumvent the prudential ratios, to the effects of equity losses of banks and insurance groups, but also due to the fear of the future and lack of confidence. Meanwhile, the vast majority of economic players have negative mid-term expectations and are decreasing their investments and staffing, which may mean several quarters of a recession spiral.
Having said that, should we consider that Private Equity is a thing of the past? While the virtual disappearance of debt for large-cap transactions and the general economic slowdown have created difficult conditions for this activity, Private Equity funds still serve an important purpose in the economy.
A number of independent studies have indeed demonstrated the merits of Private Equity:
- First, it helps provide liquidity for the transmission, succession or strategic repositioning of companies, when neither the stock market, nor any other alternative equity restructuring operations are capable of providing adequate answers;
- Contrary to a widespread belief, we focus on a medium and long term vision of our portfolio companies' development, allowing it to allocate resources to its growth whether organic or external. This focus is also reflected in the duration of our presence in the capital of our portfolio companies (usually around 5 years);
- Finally, through good governance, we enable a perfect alignment of interests between shareholders, managers and a growing number of employees.
And these key characteristics remain valid regardless of economic conditions. Long term commitment, passion to help companies benefit from profitable growth, sharing of value creation: these are the very fundamentals of our commitment.
