Current market conditions present a compelling opportunity for private equity investors
The existing credit crisis and weaker economic conditions are likely to lead to a reduced availability of credit. Many private companies are likely to raise equity to fund growth or working capital needs. These factors combined are likely to lead to greater investment opportunities for private equity investors, with less competitive pressure on investment valuations. Also, businesses with private equity backing and strong balance sheets will be well placed to capitalise on investment opportunities to strengthen their competitive positions.
Long term returns from diversified private equity funds in established markets have been superior to returns from listed equity indices
In the US, UK and Europe, private equity returns have outperformed relevant equity market indices. This out-performance reflects private equity’s ability to perform detailed due diligence on investment targets, influence management and a company’s strategic direction, and provide the company with finance and resources for growth. Management usually has an equity stake in private equity backed companies which is intended to strongly align their interests with private equity investors.
Investing in private equity greatly increases the choice of investment possibilities
The private company market in New Zealand offers a broader reflection of New Zealand’s economy than the listed market. For every listed company in New Zealand there are approximately 180 unlisted businesses with 10 or more employees.1 The unlisted business sector is also more diverse in terms of size, stage of development and the industries they operate in.
Succession of privately owned companies presents an opportunity for private equity funds
There is a large number of private companies in New Zealand that will need to address succession concerns in the short to medium term.2 A significant portion of these private companies see private equity as a potential partner.
Private equity is becoming an increasingly important asset class for investors. Allocations of 5%-10% in institutional portfolios are commonplace
Research indicates that an investment portfolio that includes both listed and unlisted investments is generally less volatile than a portfolio of only listed investments.4
Increased portfolio diversification and a low correlation between private equity and other asset class returns reduces overall portfolio risk for an investor.