Boom time for Private Equity

1.Private equity developing as an alternative investment vehicle.

2.Cashed-up private equity firms will drive changes in host economies.

Private equity is a growing trend. Even rock stars are getting in on the action. U2’s Bono is one of six partners in the California Silicon Valley start-up private equity group Elevation Partners, which recently bought the owner of Forbes Magazine in August. Banks, Goldman Sachs and Merrill Lynch are also big players.

The private equity industry is set for rapid growth over the next ten years, with pension funds in the United States and Europe likely to double their allocation to the asset class . Growth will be driven by easier access to private equity funds for investors, better exit opportunities through the financial markets and continued outperformance by private equity in terms of returns.

According to UBS, private equity as a percentage of total M&A rose to 18 percent in the calendar year to October 20 from 8 percent in the entire 2005 calendar year and 3 % in the prior 2 years.

M&A is on track to turnover more than US $ 3 trillion worldwide this year and the private equity component of that has almost tripled from its 2005 turnover. Globally, the portion of money in M&A contributed by private equity grew by just 0.6% from 2005 and actually fell in Europe from 35% to 25%. However, the trend was upward in the US, where 8% of deals were done by private equity for 32% of the money in the sector, compared with 5% of deals for 26% of the money in 2005.

Private equity markets can only develop further as the increasing trend towards indexation of equity and bond funds drive managers to seek out performance through investing in alternative assets.

The growth of private equity would feed the market for share floats, as companies bought out by private equity were sold back to the sharemarket. Also cashed-up private equity firms could develop into a strong secondary market as niche specialists applied their unique management to companies.

However, recently the UN had issued a warning about the economic and social damages facing countries where private equity funds take over local companies. The warning came after it found that a fifth of all major cross-border deals are now being masterminded by hedge funds and private equity groups. There were doubts whether this particular type of investments were always beneficial for the recipient country.

Despite its extraordinary growth over the past 30 years, private equity is still an industry in its infancy. If the sector has grown tenfold over the past decade, it is likely to do the same again in the coming ten years. That growth will help drive greater dynamism in the world economy.