Friday Letter Job cuts and ramp-ups

The news flow this week confirmed that private equity is by no means an island unaffected by the global financial crisis. Parts of it are under water, but elsewhere industry professionals are getting excited by the opportunities this crisis will produce.    

Just in case you had imagined otherwise: Private equity firms are not immune to the sink-or-swim pressures now bearing down on the beleaguered financial services sector.

This week brought news of several large private equity firms significantly lightening staff loads to more nimbly navigate rough waters – a move Terra Firma boss Guy Hands only a few weeks ago had taken some flack for predicting.

Throughout the week, cull stories were breaking in rapid succession. American Capital, and affiliate European Capital, sacked 19 percent of its workforce and closed two offices. The Carlyle Group cut 10 percent of its staff and closed its Silicon Valley location, having already abandoned its Warsaw premises and let go its Asian leverage finance team last week. 3i reduced its global team by 15 percent, eliminating mostly back-office functions.

The magnitudes of the redundancies are striking, but as far as the decision-makers behind them are concerned, it’s needs must.

“Although these decisions are clearly difficult for those affected, the outlook for markets is challenging. Our near term focus currently is on our £10bn of assets under management and preparing the business to take advantage of opportunities when markets recover,” 3i chief executive Philip Yea said in a statement.

However, as the Yea quote implies, unprecedented job losses were only half the private equity story this week. There was plenty of positive news as well.

For example: The Universities Superannuation Scheme, the second-largest UK pension fund and an influential limited partner, said the financial crisis was giving it the opportunity to aggressively expand its private equity team over the next year. It also said it is moving its alternatives allocation from 7 percent to a whopping 20 percent.

Debt-for-control investors and emerging markets focused managers were also reporting buoyancy. Oaktree Capital Management’s second European fund closed on €1.8 billion this week, and will focus largely on private equity deals that were agreed at the height of the last market cycle.

“Europe was visited by the ‘private equity miracle’ and when it turns out not to have been a complete miracle that will create opportunities in distress,” Howard Marks, chairman of Oaktree chairman, told PEO.

Also bullish are those who focus on emerging markets. Actis on Monday announced the closing of its third fund on $2.9 billion, by far its largest fund yet. Actis said it foresees its dry powder in even greater demand given market conditions.

“We’re investing in markets that are still forecast to grow between 2 percent and 7 percent next year,” noted Alistair Mackintosh, the firm’s chief investment officer. “Entrepreneurs will need capital, and they won’t be able to access the public markets.”

The implications of this distinctly mixed bag of private equity news are obvious: It’s a complex and multi-faceted picture, and anyone aiming to deliver an assessment of the state of the industry must look at it in its entirety.

“Private equity’s year from hell” was the headline of a big article in BusinessWeek this week. That’s too blunt, not only because private equity is far from alone in having a tough time, but also because the headline misses the point that not everyone in the industry is suffering. To the contrary: Many are seeing great opportunities opening up already as a result of enormous market dislocation. That is why they’re ramping up.