Private equity looking up, conference attendees told

Private equity fundraising might be in the dumps, investors more demanding and existing funds almost out of investment time, but all in all private equity's prospects are better than last year. At least that's what attendees were told at the Private Equity Analyst Conference at the Waldorf Astoria Hotel in New York Sept. 27-29.

Those attending were mainly service providers, a small army of reporters from the financial press, a sampling of fund managers and a scattering of investors. They were treated to numerous panel discussions and break-out sessions, on fundraising, the secondary markets, regulatory reform and investment opportunities.

In one of the first sessions of the conference, on the topic of what it will take for the industry to find success, one panelist bemoaned the private equity business' image problems.

Private equity executives have not done a good job with the industry's image, said Kevin J. Conway, managing partner, Clayton, Dubilier & Rice LLC.

Also speaking on the panel were Jeffrey H. Aronson, managing principal, Centerbridge Partners LP; Jeff Horing, managing director, Insight Venture Partners; and Michael W. Michelson, member of KKR & Co.

As a way of tackling the image issue, Mr. Conway announced that one of his firm's founders, Joseph Rice, has set up a private equity institute at the Brookings Institution to research positive contributions of the industry.

Contributing to the image problem is how private equity firms are a bit too private, Mr. Michelson noted.

For too long, industry executives viewed what private equity funds did as private, he said: “It's up to us to communicate more with stakeholders,” investors and those in Washington.

The public views private equity investment as a way for companies to achieve “slashing and cutting” of costs, including jobs, he lamented. “We make the companies stronger. We invest in the companies. From the investment comes growth. The story private equity has not told is a positive one,” Mr. Michelson said.

Mr. Conway noted that the private equity initiative at the Brookings Institution aimed to provide lawmakers the “true facts.”

Without those facts, private equity executives run the risk that legislators and regulators will make policy decisions not based on the facts but on anomalies they read about in the press.

Another way private equity can improve its image, at least among investors, is by improving returns.

During the conference, attendees at various sessions responded to questions using devices resembling television remote-control units that were provided at the tables. When asked what private equity could do to improve its image, the largest percentage of panel attendees, 45%, indicated “generate strong returns.”

While the conference audience is not a statistically significant sample, the surveys do show “directionally” the views of the private equity industry, said Shawn G. Hessing, national managing partner, private equity, at accounting firm KPMG LLP, in an interview. KPMG, a conference co-sponsor, is collating and will release the results of the conference survey.

Venture capital is feeling the pain because returns, especially in early-stage funds are down.

Investors are saying “Where's the beef?” quipped Chris Douvos, co-head, private equity, The Investment Fund for Foundations during a panel discussion on “What's Next for The Private Equity Industry? Analyzing the Challenges.”

Also on the panel were Stephen Murray, president and CEO of CCMP Capital Advisors LLC; Alan J. Patricof, founder and managing director, Greycroft Partners LLC; and Julie G. Richardson, managing director, Providence Equity Partners.

Average investors are getting much smaller returns than they thought they would, the panelists agreed.

“Limited partners are starting to ask the question, ‘why bother?'” Mr. Douvos said.

A few speakers predicted that not all private equity firms will make it out of the downturn.

“There will be a shakeout in the industry in the next 12 to 18 months or more,” said Timothy Clark, partner in the law firm, Covington & Burling LLP during a breakout session on fundraising. Other panelists were C. Kevin Garland, partner, The Sterling Group, and Ross M. Posner, director, Allstate Investments, which commits more than $400 million a year in private equity.

But Mr. Clark, who works in Covington & Burling's fund formation practice, added: “Private equity worked. The model did work.”

Mr. Garland said some firms violated investors' trust by failing to stay true to their investment thesis.

“Discipline is the first thing, and if you violated (investors') trust, it will be hard to regain that trust. It may take pulling back and downsizing a little bit,” Mr. Garland said. “It's going to be a challenge demonstrating the discipline over the next few years.”

Those who showed that discipline can benefit; Mr. Garland noted that Sterling Group in April closed an $820 million fund, exceeding its $600 million target in 10 months.

Investors also are questioning the fees they are paying, and are having many more discussions with their managers on that topic. Management fees and portfolio company fees have been frequent topics of discussions, said Mr. Posner. Another hot-button issue is whether funds-of-funds governance procedures — instituted to avoid conflicts of interests — really worked, he said.

There have been positive trends for the industry this year, including an increase in portfolio company sales. However, much of the sales activity has been among private equity firms.

Private equity firm executives don't set out to sell their portfolio companies to other private equity firms, Mr. Conway noted.

“They want to sell (companies) for the highest price and often, now, another private equity firm” will offer the best opportunity, he said. “We don't think this is a trend; corporate buying will pick up.”

Indeed, on the second day of the conference, Tom Lister, co-managing partner of Permira Advisers Ltd., said that of the firm's three exits this year, one was a sale of a portfolio company to the firm of his co-panelist, Raymond Svider, co-chairman and managing partner, BC Partners Ltd.. Mr. Lister asserted that both firms will do well with the investment.

A number of speakers said the best investment opportunities now are outside the United States.

Underscoring that view was an enthusiastic final panel on opportunities in China featuring David M. Rubenstein, co-founder and managing director, The Carlyle Group; Robert H. McCooey Jr., senior vice president, new listings and capital markets, NASDAQ OMX Group Inc.; and Scott Sandell, general partner, New Enterprise Associates.

“Investing in China is like investing in the U.S. in 1910,” asserted Mr. Rubenstein.

When asked how do investors know there won't be a railroad bust like there was around the turn of the last century, Mr. Sandell countered: “There is a bubble in China, and it will probably last for 50 years.”