A regular reader of PEO recently argued that the site's coverage of the industry was bordering on the sensational.My response was that it's the industry itself that's sensational right now.
Surely no one can deny that private equity is going through some enormous changes as a result of the global economic downturn and continued credit crisis – themes PEO addresses on a daily basis. Two specific incarnations of the theme played prominently on the site throughout the past month or so.
Numerous private equity firms have significantly lightened staff loads to more nimbly navigate rough waters – a move that Terra Firma boss Guy Hands had previously taken some flak for predicting.
Beginning in December, job cut stories broke in rapid succession. American Capital and its affiliate European Capital removed 19 percent of the 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 leveraged finance team. 3i reduced its global team by 15 percent, eliminating mostly back office functions. Meanwhile, Cognetas cut 12 percent of its staff while Sun Capital said goodbye to 10 percent.
The magnitude of the redundancies is striking, but as far as the decision-makers behind them are concerned, it's a case of “needs must”.
It's become clear that another necessary evil is devising a strategy to try and head off the potential for defaulting limited partners.
Eyebrows were raised when Permira said it would let investors reduce their commitments to its latest fund by 40 percent. At the heart of the issue is SVG Capital, Permira's largest investor. SVG's investment model relies on an over-commitment strategy that has come unstuck as distributions from previous investments have dried up. Given the size of SVG's commitment to Permira's latest fund (€2.8 billion), as well as the close relationship between the two organisations (Permira has a 4 percent equity stake in SVG and SVG invests the majority of its capital in Permira funds), this is an extraordinary situation.
Yet SVG is far from the only investor in the world struggling with its private equity obligations. For anyone still unconvinced, they need only look at TPG's late December manoeuvres. In addition to allowing LPs to reduce commitments to its fund by up to 10 percent, or a total of $2 billion, TPG also said it will cut its annual management fees by one-tenth and promised not to call more than 30 percent of LPs' commitments in 2009.
All of the above have prompted journalists in our newsroom to pose questions such as: “Have any of your investors missed capital calls?” and “Which offices might you be forced to close?”
Sensational times? Absolutely. But not sensationalist coverage, we'd argue.