Friday Letter Success in the downturn

The results of our eighth annual global readers’ poll remind that which firms are in favour will fluctuate as the industry confronts its greatest challenge.  

Congratulations to the winners of more than 60 categories in the Private Equity International Awards 2008. It marks the eighth year that that PEO’s and Private Equity International’s readers have nominated and voted for their peers. And it marks the second year that winners will be able to celebrate in style at our Private Equity International Awards Global Winners' Celebration in June. Click here for the full list of winners.

This year’s voting patterns reflect some of the changes and challenges confronting private equity firms and affiliates.

There are, indeed, many returning winners – Lexington Partners and HarbourVest Partners continue to claim the respective prizes for best North American secondaries firm and fund of funds, for example.

But it is also telling that all of 2008’s regional winners for best LBO firm, best mid-market firm and best debt provider are a departure from the previous year’s results, just as the types of deals being done – and leverage extended for them – in each region have changed since then.

In Asia, CCMP Capital was displaced by Affinity Equity Partners as LBO firm of the year. Affinity, which has already ridden out two recessions, has been scaling down investment since 2007, and in fact, has not made a single investment in the past 12 months. This despite the fact it closed its largest fund to date on $2.8 billion at the start of 2007. Affinity was in 2007 voted Asian mid-market firm of the year, an honour now belonging to Hong Kong-based HSBC Private Equity (Asia), which wrapped up its sixth fund over-target on $1.47 billion towards the end of last year.

As in Asia, North America’s 2008 LBO firm of the year, Hellman & Friedman, didn’t do many deals in 2008, but the ones it pursued captured attention and admiration. Hellman completed significant deals without much debt, like its acquisition of Getty Images for $2.4 billion. The North American mid-market firm of the year, the 30-year-old Welsh Carson Anderson & Stowe, expanded its operations team to bolster its technology expertise and moved quickly toward closing its 11th fund in 2008, raising a total of $3.7 billion on its way to a $4 billion target.

The 2008 European LBO firm of the year, CVC Capital Partners, expanded into mainland China, established a financial services team, raised a giant new fund – which closed on €11 billion in January 2009 – and also provided hints as to how it might successfully invest the capital. With mega-deals off the agenda, it took a minority stake in Germany’s Evonik Industries while at the same time earning the plaudits of its government owner. Meanwhile, European mid-market winner Advent International had a luxury few other private equity firms could afford, given less-than-benign fundraising conditions: faced with demand of around €10 billion for its latest global fund, Advent opted to restrict its size to €6.6 billion.

Change was also rife in the leveraged finance categories of the awards. For the first time since their inception, Royal Bank of Scotland did not win the European debt provider of the year category (Deutsche Bank took the honours). It was a striking sign of the times: Last week the troubled UK lender, having reported the largest ever annual loss for a UK company at £24 billion, said it would no longer fund large-scale LBOs, nor provide long-term project finance loans.

In Asia, HSBC displaced JPMorgan as best debt provider, but in North America, JPMorgan took the honours from 2007 winner Goldman Sachs. As the investment bank industry continues to grapple with losses, troubled assets and changes to its composition, their leveraged loan teams will undoubtedly be affected. 

So, too, of course, will be the private equity firms that depend on them. With debt financing elusive and or taking new forms, the success of buyout firms going forward may not be judged on deal-doing. Instead, fund managers will be assessed in terms of capital preservation and their overall conduct in a time of crisis.