Unraveling the state of the private equity industry
Hassan Ragab and Joseph Chong, WG'04
Issue date: 2/17/03 Section: News
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The recent Wharton Private Equity Conference provided students and industry professionals alike with an insightful view into the current state of the industry. Panels of experts offered their perspectives on where the industry stands, which trends are likely to affect it going forward, and how firms plan to find investment opportunities in this volatile market. Without attempting to cover every session, and knowing that we can't do justice to every speaker, we'll touch on some of our own highlights from the event.
During the first session - 'Buyout Investing in a Mature Market' - the moderator, Paula Chester, directed sharp and pertinent questions to a seasoned group of 'the usual suspects' (including professionals from Thomas H. Lee, KKR, The Carlyle Group, Bain Capital, and JP Morgan). Following a discussion on large-cap versus middle-market transactions, the panelists were (not surprisingly) unanimous in declaring that middle-market deals are significantly harder to pursue in the current climate. Auctions, with their tendency towards overvaluations, and the miserable state of capital markets were labeled as the main culprits.
Members of the panel then described some of their own recent activities - and this was definitely a highlight. General issues and industry trends are all good and well, but what we really want to hear are the juicy tidbits about deals that flop, partners who can't be trusted, and valuations based on absurd assumptions. Todd Abbrecht, from TH Lee, helped to satiate our need with a story about a French acquisition that fell apart because the majority of the company's clients were operating on 'handshake arrangements.' Without tangible contracts, the deal felt too risky and they were forced to pass on it. Foreign intrigue, shady transactions, cultural miscues - altogether a crowd-pleaser and I, for one, enjoyed the telling of it.
Paula didn't pull any punches either, and before the event was out she made sure to ask some of the tougher questions we all had in mind: (1) Are any of their funds currently underwater? (2) What is their policy regarding 'clawbacks'? And (3) How are their firms dealing with succession issues as they tighten their belts in response to sagging returns? It was easy to see that Ms. Chester (former director of PE investments for NY State Retirement Fund) certainly understood the nuances of the buyout business, and each panelist responded with a refreshing degree of candor.
During the first session - 'Buyout Investing in a Mature Market' - the moderator, Paula Chester, directed sharp and pertinent questions to a seasoned group of 'the usual suspects' (including professionals from Thomas H. Lee, KKR, The Carlyle Group, Bain Capital, and JP Morgan). Following a discussion on large-cap versus middle-market transactions, the panelists were (not surprisingly) unanimous in declaring that middle-market deals are significantly harder to pursue in the current climate. Auctions, with their tendency towards overvaluations, and the miserable state of capital markets were labeled as the main culprits.
Members of the panel then described some of their own recent activities - and this was definitely a highlight. General issues and industry trends are all good and well, but what we really want to hear are the juicy tidbits about deals that flop, partners who can't be trusted, and valuations based on absurd assumptions. Todd Abbrecht, from TH Lee, helped to satiate our need with a story about a French acquisition that fell apart because the majority of the company's clients were operating on 'handshake arrangements.' Without tangible contracts, the deal felt too risky and they were forced to pass on it. Foreign intrigue, shady transactions, cultural miscues - altogether a crowd-pleaser and I, for one, enjoyed the telling of it.
Paula didn't pull any punches either, and before the event was out she made sure to ask some of the tougher questions we all had in mind: (1) Are any of their funds currently underwater? (2) What is their policy regarding 'clawbacks'? And (3) How are their firms dealing with succession issues as they tighten their belts in response to sagging returns? It was easy to see that Ms. Chester (former director of PE investments for NY State Retirement Fund) certainly understood the nuances of the buyout business, and each panelist responded with a refreshing degree of candor.