Private Equity Experts See Storm Clouds Lifting
Feb. 9, 2011
Fundraising might be tougher, investors more demanding and new government regulations more challenging, but indicators suggest brighter days are on the horizon for the private equity world in 2011.
That’s what industry leaders told an audience of fund managers and institutional and private equity investors gathered last week for the Private Equity Funds Symposium held at the UT Dallas School of Management.
Sponsored by the School of Management’s Center for Finance Strategy Innovation and business and public policy law firm Patton Boggs, the conference focused on “Navigating Change in the New Private Equity Environment.” Top investors, industry experts and Washington insiders offered insights into crucial topics affecting the ever-evolving private equity marketplace.
One of biggest changes for investors will come with the landmark Dodd-Frank Act, which will enact sweeping new rules on financial institutions during the next year. The first panel of the day discussed how the new 2,300-page law, aimed at preventing taxpayer-funded bailouts like those that followed the financial crisis of 2008-09, will impact private fund advisers with additional registration, record-keeping and reporting requirements.
The financial overhaul has created many uncertainties and is “so broad – all 2,300 pages of it. Until these things come out and are finalized, we don’t know in many cases to whom they apply and even if we know to whom they apply, we don’t know how they apply,” said Don Moorehead, vice chairman of Patton Boggs and panel moderator.
Federal regulators have “been handed a gargantuan task,” as they sort through the new law to shape the implementation of U.S. financial regulatory reform, said Moorehead. “The description that they put out with respect to the derivatives regulation and dealing with what the major definitions are is 374 pages long, so we have a long way to go before we really know what Dodd-Frank really says in terms of how it’s applied.”
The challenging private equity fundraising environment, along with new restrictions on bank investments, is making Small Business Investment Company licenses a much more attractive option to fund managers and financial executives, said Brett Palmer, president of the National Association of SBICs, in the second panel discussion.
Though the SBIC program has been around for more than 50 years, it has just recently seen an uptick as managers see less funding available to them, Palmer told the audience.
The program, run by the Small Business Administration, has many benefits, said Palmer, including a shorter licensing process, an appeal to investors and outstanding access to leverage.
“This program is also getting a lot of political support to focus in and make it work well. The program costs nothing. It’s one of the few things in the federal government that you can actually say that about. It actually makes money for the taxpayer,” Palmer said.
A third panel of experts discussing raising funds in 2011 agreed that the fundraising environment has been difficult, following a “golden age” of rising markets, mega-deals and bumper profits before the financial crisis brought the private equity industry crashing back to earth. However, panelists predicted a brighter future for 2011.
“For those of you old enough to remember, 1988 through 1993, the real estate market was a mess and it was difficult. … The last couple of years compares to that. There have been lots of people wanting the money, but very few people wanting to pass the money across the aisle. So it has become the ‘haves’ and ‘have-nots.’ Lots of people in the ‘have-not’ category are having trouble raising capital, but it’s getting better,” said Tripp Brower, a partner at Capstone Partners.
Probitas Partners partner Robert Hofeditz agreed. “I think we’re closer to the end. I think 2011 will be a transition year, and hopefully 2012 will be a much better year.”
The trend today, he said, is away from the bigger mega-buyout funds toward a focus on smaller mid-market and regionally focused vehicles. Many investors are holding back from making new commitments, focusing instead on their existing portfolios, he said.
“I think what you’re going to see in the next couple of years is lower middle-market probably get raised pretty heavily, and that’s on a fund size basis of $200 to $500 million,” Hofeditz said.
Limited Partners today are looking for a “new hybrid” of investor who wants to be more hands on and understands not only technology, but more importantly, the marketplace, said Roman Kikta, managing partner at Mobility Ventures.
“Being a small fund, we tend to look to not the tier one Limited Partners and institutional investors, but there are also groups that are much more amenable to working with smaller funds, especially emerging market funds. … When we make an investment in a startup company, we look at the management team and their partnerships, their track record and history,” Kikta said.
“If you have capital, this is the time to be investing and buying and playing in the game,” he said.
Don Moorehead, vice chairman of Patton Boggs, said the private equity firms won't know the effects of the Dodd-Frank Act until they have a chance to read and interpret its full contents.
Ronnie Jung, executive director of Teachers Retirement System of Texas, delivers the keynote speech at the Private Equity Funds Symposium, held at the School of Management.