The banks that finance so much of the private equity industry expected to be left holding massive loan losses, but were able to dispose of the loans, even if they were at a discount. This allowed them to free enough capital to meet their capital requirements.
Contrary to the popular sentiment at the time, there were very few private equity bankruptcies and governments, generally, did not move to constrain the industry. The experience was the same on both sides of the Canada-U.S. border.
He took a dig at cynics who blamed private equity for “everything from leprosy to climate change,” while conceding that “(private equity) was not actually blamed all that much for the downturn.”
He chalks it up to the visibility of the banks and attention attracted by their loans. But in Europe, the story is quite different, and there is growing anti-private equity sentiment.
“The EU is considering a directive that will dramatically change private equity growth. If it goes through, Canada and the U.S. would not be able to raise money from private equity investors in Europe,” Rubenstein said. “Governments in the EU are probably the greatest threat to private equity right now. The EU would be the centre of much intense lobbying and activities.”
Europe has dubbed private equity ‘Anglo-Saxon capital’ as many continental Europeans firmly believe the industry benefits only the U.S., Canada and the UK.
“And that is not a term of endearment,” says Rubenstein. “Improving the image is important. Trade associations and other organizations in the U.S. and Canada, and those around the world, could improve the image of the industry.”
Efforts are being made to increase social awareness of the industry and to develop guidelines for responsible investment, he says.
The private equity industry is on the upswing, says Rubenstein. “One survey shows over 51% of institutional investors say they would again begin commitment to private equity funds.”
That, he says, is a big change from last year. He draws attention to increasing portfolio valuations and to deals getting done with different leverage ratios and in lower multiples. “The average equity contribution has increased. In the mid-1970s average equity component was only 5%, but it went up to over 30% in 2007, and now it is at over 50%.”
Industry transformation
The private equity industry tends to transform itself to protect against recession and other negative trends. It is doing so once again by reducing the size of its deals and its funds. “I don’t think you are going to see a lot of $10 billion and $20 billion dollar funds. You will see a lot more $3 billion to $5 billion funds,” Rubenstein predicted.
Co-investments and diversification of product offerings are other trends that are predicted to emerge.
Some of the other protective measures would include sparing use of leverage, higher equity contributions, and more expensive debt. “The investment base is going to change a bit. You will see shrinkage of high-net worth investors. There will be more institutional investors, who were not as heavily hit as public pension funds were.”
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