Private Equity Firms “Go Global” in the Face of Slowing Growth

Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to Grant Thornton International Ltd’s Global Private Equity Report. Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe.

“The report highlights that the search for profitable growth remains fundamentally about strategy rather than pure geographical expansion. Growth remains the key, and is driving the globalization of the private equity industry, including Canada”

“A central role of the private equity community is to seek new growth opportunities and then act as a catalyst for that growth. Many of today’s investors are finding themselves at the centre of the evolution of a truly global economy and the continuing search for new corporate frontiers,” says Tim Oldfield, Partner, Corporate Finance, Grant Thornton LLP.

“The report highlights that the search for profitable growth remains fundamentally about strategy rather than pure geographical expansion. Growth remains the key, and is driving the globalization of the private equity industry, including Canada,” he adds. “At the same time, private equity is also acting as a driver of globalization. Canadian private equity firms need to grow outside the Canadian market».

The report provides insight into the expectations of private equity general partners (GPs) for numerous aspects of the fundraising and investment cycle. It shows, among other things:

• Indonesia, Peru, Colombia and Turkey top the list of new “high growth” markets where private equity is likely to see the most opportunities;
• deal activity expected to slow in China and India;
• foreign trade buyers seen as most likely exit route (particularly Japan, China and Korea);
• a dramatic drop in fundraising confidence and economic outlook.

Fundraising fears
This year’s report sees a marked decline in fundraising expectations of GPs around the world, with nearly three-quarters (72 percent) describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 percent. The most dramatic decline in optimism from 2011 is evident in the BRICS: Brazil, Russia, India, China and South Africa. This year, 78 percent of respondents in these markets described the fundraising outlook as “negative” or “very negative”. In 2011, the figure was 39 percent.

Private equity firms looking for new investors
Private equity firms are expecting to have to turn to a greater number of new investors – or limited partners (“LPs”) – and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 40 percent of respondents said they expect their next fund to be majority funded by first time investors. In 2011’s report, this figure was only 24 percent.

Global exit routes
Private equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents (52 percent) expect the majority of the trade buyers they transact with in the near term to be foreign, while a further 20 percent expect the split between foreign and domestic buyers to be 50-50. Only 28 percent expect to deal mostly with domestic trade buyers. Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate.

Regions as expected sources of non-domestic acquirers

China, Japan, Korea		31%
Europe		24%
North America		22%
South East Asia		11%
India		10%
MENA		1%
Africa		<1%
Latin America		<1%
Russia		<1%

Top ten “high growth” markets
While growth in “high-growth” countries outstrips that seen in Western markets, the search for growth leaves local private equity firms to keep a watchful eye on where tomorrow’s deal-flow will originate. While a move to new unknown territories may be a risk too far for many Western funds, investors based in regions such as Canada typically have good visibility on the next frontier markets.

1		Indonesia
2		Peru
3		Colombia
4		Turkey
5 =		Myanmar
5 =		Egypt
5 =		Saudi Arabia
8 =		Mexico
8 =		Ghana
8 =		Malaysia

xpected investment activity by region

Region		Increase		Same		Decrease
Asia Pacific		50%		44%		6%
China		33%		11%		56%
India		33%		22%		45%
Latin America		78%		22%		0%
MENA (Middle East & North Africa)		60%		33%		7%
North America		59%		41%		0%
Western Europe		27%		64%		9%

There is an enormous expectation for growing new deal activity in Latin America with 78 percent reporting that they expect an increase. This represents only a slight dampening of last year’s sentiment, when 89 percent of respondents expected deal activity to increase in the region.

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