Colony: 2009 vintage funds will be best performers

Colony Capital chairman Tom Barrack says the industry faces its ‘greatest opportunity and challenge’ this year, with 2009 investments expected to make ‘historically high returns’. Not all firms will survive though, with those fundraising facing significant obstacles.

Private equity firms with dry powder to deploy in 2009 will make “historically high returns” with the next 12 months expected to be a time of the “greatest opportunity and greatest challenge”.

Colony Capital founder Tom Barrack, in his latest chairman’s corner memo, said the investment opportunities facing investors would be “prolific” and life-changing.

“For the private equity firms with dry powder, in historic perspective, these will be the best times,” he said. However, he warned, not all firms would survive the “tsunami” of the collapse in the world’s debt markets and global economic downturn, arguing many competitors would be “wiped out” with many “investment banks and commercial banks … crippled”.

But he went on: “Those private equity firms which sold the most assets in the 2005 to 2007 vintages will be the best positioned. New opportunities will be prolific and will change many industries. An enormous number of companies will need fresh capital. Private equity will be one of the few asset classes with remaining liquidity and it must be judiciously used.”

Barrack compared the opportunities in 2009 to the RTC days of the early 1990s and the bursting of the dot-com bubble in the early 2000s, when US private equity firms made returns in excess of 25 percent.

“Now is that moment for investing. Now is that moment when private equity has its greatest opportunity and its greatest challenge,” he said.

Comparing the economic turmoil to surfing, Barrack said anyone in the water at the time of the tsunami would be punished. The key to success, though, would be how that firm managed its team’s survival.

“The great leaders will then gather their teams and swim out to sea in search of the next big wave smarter, wiser and with much more experience. Those watching from the parking lot will never possess the knowledge of how to handle the unpredictability of those waves.”

He said all private equity and real estate firms would have to spend time improving their portfolio companies’ operational performance, following 20 years of making money owing to “cheap and covenant-lite debt”. Those out fundraising would also face significant obstacles, he said, concluding: “We all must work twice as hard, twice as smart, for half the gains.”