Jack Perkowski, author of Managing the Dragon, and one of the leading experts on doing business in China, offered a snapshot of what’s ahead for private equity investing around the world on his website recently. Perkowski has just returned from the SuperReturn Middle East 2008 Conference in Dubai, an elite gathering of 500 private equity professionals whose focus is on Middle East and North African investment. Speakers included Henry Kravis, David Rubenstein and Steve Schwarzman, founders of KKR, Carlyle and Blackstone, respectively.
There was overwhelming consensus that it would take three years or longer for financial markets to recover to their 2007 highs, Perkowski said. More than a third of attendees felt it would take even longer, and that the U.S. and Europe, in particular, were in for protracted recessions.
Perkowski also said that the traditional private equity model is broken. The days of using financial engineering (i.e. high leverage, “covenant light” debt and arbitraging higher exit multiples) to generate higher returns are gone. Instead, the focus will be on buying good companies at substantial discounts and growing the company as a way to generate acceptable returns.
Nearly two thirds of conference attendees felt that the best returns over the next five years will come from the Asian region and India. The impending global recession may be a blessing in disguise to China and India, in that it will merely cool down their overheated economies to a more manageable level of growth. Perkowski also commented that the center of gravity of the global economy had already started shifting outside of the developed markets into rapidly-growing countries such as China and India, and resource-rich countries such as Russia, Brazil, Indonesia and Australia. The current economic crisis will only hasten this trend.
Private equity’s traditional aversion to taking a minority investment in firms may change, too. Buy and hold strategies, such as Warren Buffet’s recent strategic investments in General Electric and Goldman Sachs, may become more prevalent. Obtaining majority interests in China, for example, tends to be difficult. Deals are smaller and generally unleveraged. Thus growth capital deals may be the trend of the future.
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