06 Jul 2012

Private Equity insights in the context of the EU economy

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Private Equity

Being exposed to the Impact Investing case with various projects under analysis, I attended a conference on Private Equity in Luxembourg, with the ultimate intention to discover the actors of this sector in the Grand-Duchy. The community of the Private Equity and Venture Capital is quite small, but it must be measured with respect to the size of the Luxembourg economy along with its strong international exposure.

The debate of the panel was structured around 3 parts :

  • the political framework surrounding the Private Equity sector in the EU
  • new strategies in Private Equity
  • fund raising

The highlights of the debate are reported below.

Political framework in the EU

With the rise in Private Equity operations and in the amount of private capital poured in SMEs, the politicians seem to get a better understanding of the impact of this financial service in the economy.
Private Equity is neither banking ; it is nor operating in the shadow (referring to the “shadow banking” practices that are alleged to be an under-estimated cause of the current financial crisis). It is a regulated instrument. It is a very different industry than it was in the past. The leverages are much lower than they used to be.
The Venture Capital activities are suffering from the current financial turmoil more than Private Equity.

Investment strategies

The Private Equity sector is growingly moving towards a strategy of niche … simply because the needs are becoming more specific. The specialization may be geographical or industrial. Some Private Equity players are like multi-asset managers : they invest in various field such as real-estate, energy or debt. The mid-market is getting more difficult and the panelists speak about “hotspots” rather than countries, when it comes to build a strategic action plan. They outline also that the holding period is growing up along with the time spent with the companies.
According to them, a regulatory framework is necessary to develop sustainable Private Equity without coming up to a bubble. The clean-tech sector is for instance seen as a potentially “risky” niche as many players have rushed into it to fund projects of renewable energies.
Unanimously, the panelists agree that the value creation is coming first and foremost from operational improvement (enhancement of the operational efficiency and support to the leadership in order to put the company to the next level). The financial performance is just second in ranking.

Fund raising

With Solvency II and Basel III getting into force, investments from banks will be more and more oriented towards targets that require not too much capital. It is a blow for the Private Equity sector, but further acute for the Venture Capital segment. With the time being, liquidity is seen as being more secured. Then, what is the alternative to raise funds ? The panelists observe a shift in the investors’ base, with government sources and the Eastern world as significant providers of cash inflows. They conclude that it is urgent to make the case for Europe … instead of always speaking of “crisis” !

“Let’s get positive” … seems to be their last word.

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