The Wharton Private Equity and Venture Capital Conference 2010, which is now in its 16th year, deliberated on a very apt theme--A new dawn: Investing in the Post Crisis World. With over 500 delegates, including some of the world’s most noted names in the private equity world, the conference had three keynote speakers, John F. Mcgrue, CEO, Apax Partners; Dalip Pathak, head of Warburg Pincus Europe and India; and Paul Holland, General Partner of Foundation Capital. The conference highlighted some of the key concerns for the private equity industry and also gave pointers on the road to recovery in the post-crisis era. Some of the key takeaways from the conference are as follows:-
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‘Shifting to Emerging Markets Premium From Emerging Markets Discount’: The panel comprising of PE funds, with an investment history across Brazil, Russia, China, India and Indonesia, discussed in depth the opportunities in these hot-growth emerging economies. Says, Dmitri Elkin, MD, UFG Capital Partners, with a decade-long experience in investing in Russia, the transition in these economies is evident from the fact that now analysts are applying an emerging markets premium in valuations rather than an emerging markets discount. The common broad-based agreement was that the investing opportunities existed not only in India and China but also in markets such as Indonesia and Korea.
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‘Super Cycle In Distressed Investing Now’: The broad consensus among panelists was that “we are amidst a super cycle in distressed investing”. Though the best time to trade was last spring (when there were cheap securities available), there were still pockets within the distressed investing space in the US where good opportunities to make money still existed. Geographically, Dubai and Europe seem to be attractive markets for distressed investing. The US still is very much overleveraged and, going forward, the super cycle of distressed investing would last over 2011 and 2012 too.
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‘Beware of your Capital Structure’: Perry Golkin, Partner , KKR , has an interesting take on the lessons learnt from this crisis. He believes that nothing was new about this crisis and that this crisis was similar to the way previous crises turned out. In order to avert adverse situations like this crisis, an investor needs to do his homework to the full, be conscious of the firm’s capital structure and always be prepared for the unknown by placing safe bets every now and then.
‘Alignment of Management Incentives Is Crucial’: Jackie Reses, Apax Partners, believes that the PE industry would do well to give the management of the firm adequate rights which would help them create an atmosphere to think about firm performance optimization. For this, the pro-active approach the PE world could take is to hire a team of ex-CEOs who would be in a much better understanding on what resources a particular firm’s management requires to really drive superior performance.
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‘Cyclical Firms Can Be Restructured; Critical To Identify’: Q. Munir Alam, managing member from Watershed Asset Management highlighted that distressed firms can be classified into two broad categories: Cyclical firms that can be restructured and are currently just victims of the depressed state of markets and Zombie firms that are fundamentally weak and on a decline. As a distressed investor, one should be able to identify one from the other and take positions accordingly.
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‘Leveraging The Upturn’: Most PE firms took the crisis as an opportunity to devote more time and resources to nurture their investments, consolidate and conduct quality checks so that when the cycle turns northwards again, they were in complete control to benefit from the market. Measures such as optimal decision-making, benign leverage levels, moderate risk-taking and diversification hold investors in good stead to brave such crises.
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Vashistha Maheshwari is an MBA student at Indian School of Business and is currently undergoing an exchange programme at The Wharton School, University of Pennsylvania. He also contributes articles to VCCircle.
