Wharton Private Equity Review: Finding Value in a Crowded Market
In private equity, opportunity can come in the form of distressed companies, wind farms, rapidly developing regions like Asia, or even an artificial stone manufacturer. In this special section — produced in cooperation with students from the Wharton Private Equity Club — Wharton faculty and experts from private equity and venture capital firms comment on the investment trends that are shaping the industry.
Download the entire report:
There are strong prospects for private equity in the rapidly developing markets of India and China, according to Wharton faculty and private equity experts. In fact, they note, the debate over which country is the better venue for investing is less important than knowing how the strengths and weaknesses of each nation would impact a specific investment.
Three of the hottest initial public offerings in 2005 were in alternative energy. Other clean technology companies — from solar to wind power and biofuel — are hoping for similar blockbuster returns, and venture capital firms are fattening them up with equity infusions in preparation. Industry experts weigh in on whether or not the sector will live up to its promise.
According to speakers at the 2006 Wharton Private Equity Conference, the most important element of operational performance is getting the right management team, which requires private equity owners to make a swift decision about whether to keep or let go of existing senior executives. After that, they say, private equity firms need to drive returns through management incentives, tight monitoring and forward-focused strategies.
Looking to make a profit from companies that have failed to do so and are on the brink of bankruptcy, ‘distressed for control’ investors restructure businesses by bringing in new managers, installing a new strategy, and renegotiating labor and supplier contracts. While 2005 was a record year for these transactions, Wharton faculty and private equity practioners say more ‘bad’ news is on the horizon — “a second wave of bankruptcies” leading to what one expert calls “an extraordinary market” for ‘distressed for control’ investors.
To take the pulse of the private equity industry, members of the Wharton Private Equity Club coordinated a roundtable discussion among four leading limited partners representing, in total, well over $30 billion of alternative asset buying power. The topics they discussed included the convergence of private equity and hedge funds, distressed debt, changes in venture capital, and the outlook for general partners.
When private equity firm Graham Partners received a memorandum proposing the rollup of a franchisor and two of its franchises in the building products industry, the firm recognized the chance to invest in a high-margin, high-growth business. The combined company would not have a management team, infrastructure or information systems, and Graham had no previous experience in the niche. Sound like a good deal? While it’s not for the faint of heart, this is just the kind of situation in which operations-oriented firms can thrive, but not without certain risks, say private equity experts. One critical risk element: timing the exit.