Private Equity
The term "Private Equity" describes investment in the equity capital of companies which are not listed on the stock exchange. This form of investment puts less emphasis on interest payments and regular distribution of dividends – private equity investors achieve earnings typically by value appreciation between acquisition and exit. Exit is normally via IPO or trade sale (i.e. sale to an industrial investor). The difference compared with shares of stock exchange listed companies is that there is no regular trading in these shares.
Access for private investors via funds of funds
Private investors were previously prevented from accessing such funds by the high minimum investment amounts of several million euros. Funds of funds collect capital from a large number of investors, making it available to purchase equity in a selection of the most successful private-equity companies, and thus enabling investors to have a stake in this exciting segment. Equity participation in non-stock-exchange listed companies has produced outstanding results, especially in the buy-out segment, which concentrates on companies with established structures and functioning business models.
Market trends
Up until June 2007, the trend was towards ever-larger deals and ever-growing transaction volumes, and the period was marked by a long string of successes and profitable growth for the private equity sector. Investments from this era are characterised by the extensive use of loan capital as the banks made free with their credit, with few strings attached. This, in turn, led to excessive valuations of the companies being taken over.
Subprime crisis
With the onset of the subprime crisis in July 2007, investors began to view market trends in a more critical light. As the euphoria receded, banks became increasingly reluctant to finance major corporate takeovers. As a result, higher proportions of proprietary capital were needed, and valuations of potential takeover candidates moved back towards historically average levels.
Financial market crisis
Then in September 2008, Lehman Brothers – one of the world’s biggest investment banks – filed for bankruptcy, intensifying the crisis to such a degree that it came to threaten the financial system’s very existence. Due to the almost complete drying up of loan capital to finance takeovers, activity on the private equity market came to a virtual standstill. Like most other companies, many private equity-financed enterprises had been suffering from plummeting orders, turnover and profits and, to make matters worse, takeovers of companies by private equity funds are always co-financed by loan capital, which is normally provided by banks. Accordingly, the credit crunch which went hand in hand with the financial market crisis hit these businesses particularly hard.
Every crisis offers opportunities
Despite the state of affairs outlined above, it can safely be assumed that classical private equity will once again come to be seen as an attractive investment proposition. Prices of potential portfolio companies are falling, and the availability of bank finance can be expected to normalise in the medium term. Given these low current valuations, private equity firms which can avail themselves of sufficient free funds should be able to pick up some lucrative investments over the coming years. Past experience has shown that the highest returns in classical private equity are to be had during times of economic downturn. All in all, market experts agree that the crisis will contribute to a normalisation of the market, which should in turn open up a broad spectrum of attractive investment opportunities.
Nordcapital Private Equity funds
Nordcapital manages its private equity business via its subsidiary equitrust AG. At present, 9 private equity funds were launched with an investment volume of some €200.0 million.
created: 27.05.2009