Private equity (PE) firms will see unprecedented challenges over the next few years, given the depth and duration of the current financial crisis. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge at Wharton looks at how markets are shifting and what participants can expect in the coming months. One example: Deals that settled for just 15% in equity a couple of years ago now require 35% to 40%, and up to 75% for some smaller buyouts. Going forward, a "wall" of refinancing due in 2012 will challenge the survival of many portfolio companies — and PE firms as well. Also included in this report are a roundtable discussion on the secondaries industry (the buying and selling of pre-existing PE commitments) and an interview with Dalip Pathak of Warburg Pincus and Bridgepoint Capital’s Alastair Gibbons on the prospects for PE in India and China.

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The Coming ‘Wall’ of Refinancings:
A Trial for Private Equity Firms — and Their Portfolio Companies

Private equity faces a difficult environment as credit markets try to absorb maturing debt from large leveraged buyouts. Panelists at the 2009 Wharton Private Equity & Venture Capital Conference said financial sponsors are scrambling to prepare for the refinancings that will start coming onto markets in 2012. They also noted that firms are focusing on portfolio company operations, exploring new positions in the capital structure and considering strategic, synergistic transactions.

Continuing Defaults by Private Equity Portfolio Companies Transform the Middle Market
At the peak of the private equity boom, the largest leveraged buyouts ballooned in value and captured headlines. Traditional middle-market deals also grew at a robust pace, but with less fanfare. Now that the market has turned, both sectors are challenged. Panelists at the 2009 Wharton Private Equity & Venture Capital Conference said opportunities, or "gems," are nonetheless still available for investors in midsize deals if they approach transactions creatively and consider taking new and innovative positions in companies’ capital structures.

‘True Turnaround Specialists’ Are Poised to Survive in Today’s Challenging Private Equity Market
As the economic downturn continues and bankruptcies rise, private equity is turning away from traditional leveraged deals and toward investment in distressed companies, according to speakers at the 2009 Wharton Private Equity & Venture Capital Conference, "Multiplicity Without Rhythm: Investing in Chaotic Markets." Specialists in distressed businesses expect a tidal wave of private equity deals made in 2006 and 2007 to go bad in the next few years. Given the number of opportunities and the lack of bankruptcy credit, many restructurings will occur outside of bankruptcy court and could result in swift liquidation.

Private Equity Secondary Funds: Are They Players or Opportunistic Investors?
Investment managers involved in the private equity (PE) secondaries industry — the buying and selling of existing PE commitments — see distressed sellers continuing to act as a source of growth through 2009 and 2010. In an interview with members of the Wharton Private Equity Club, three senior members of firms that focus on these transactions predicted the role of secondaries will grow over the medium and long term as they provide a solid source of short-term liquidity, allow larger PE positions to change hands and make it easier for investors to adjust their PE portfolios.

India and China Offer Attractive Private Equity Opportunities, but Without Majority Control
Strong fundamentals in China and India continue to offer some highly attractive opportunities for prudent private equity investors. But successful PE investments require careful planning and a regional presence in order to identify lucrative opportunities and better understand potential competitive threats to Western companies. To learn more about private equity investment in these countries, members of Wharton’s Private Equity Club recently interviewed Dalip Pathak of Warburg Pincus and Alastair Gibbons of Bridgepoint Capital about their views on the best investing practices in today’s transformed environment.