The view from the buyside

As a starter, we asked a number of European institutional investors what they thought was in store for private equity in 2002. Just in case anyone had forgotten, we should repeat the mantra [intoned by all GPs when reporting to their LPs about technology heavy investment portfolios]: investing in the product is a long-term undertaking. But because 2001 was, by anyone's standard, such a taxing year for the industry, investors are naturally wondering what the near term will look like. Unsurprisingly, a return to normality is not expected just yet.

2002 will be tough for private equity, particularly for the partnerships that invested in the heady days at high prices?, says Peter Murray, chief executive of the Railway Pension Trustee Company in the UK. ?I don't expect the IPO market to reopen, and many funds will be left trying to help investee companies pull through a very difficult period.?

As a result, there will be a further deterioration of portfolio valuations, predicts Bruno Raschle, managing director of fund of fund manager Adveq Management, particularly in the buyout market where he says people have been overpaying for years. ?Investors will put more pressure on GPs to come up with appropriate valuations, because they are often not in line with other market indicators.? Investment consultancy Watson Wyatt's Stephan Breban, a senior investment consultant, agrees: ?On the whole, managers will have to revalue down again.?

The good news is expected from the funds that have raised cash recently and avoided the buying hysteria of 1999 and early 2000. Buyout funds that have kept their powder dry are looking especially attractive. ?It's not always at the start of a recession that companies need cash, and initially the buyout market will be slow, but it will accelerate?, says David Currie, managing director at Standard Life Investments, who believes that prices will be more attractive than they have been in years.

David Gee, Investment Director at Yorkshire Fund Managers, says the climate going forward will continue to make for a tricky environment for getting deals done, but at least there will be less volatility in the market. ?There is still a significant price differential between public and private companies, but we are unlikely to see the big swings of 2001?, he says.

It's one thing to buy, at times quite another to sell and many believe that exits will continue to be very hard to come by. However, as Invesco's Ray Maxwell points out, there will be exit opportunities so long as the M&A market picks up: ?The key thing I would like to see in 2002 is an increase in M&A volume, because that would move everything out of this period of inertia.?

These comments may betray a certain lack of excitement about 2002, but we didn't speak to anyone who had grown disillusioned with the asset class. No one said they had made short-term changes to their allocation strategy, and a majority of those polled (70 per cent) predicted that their allocations would increase.

Such loyalty at a time of widespread uncertainty may be surprising, but, as Abbey National's Christian Dummett commented, ?the private equity industry over the last four years has proved itself as a serious buyer and seller of assets. I'd like to see this trend continue.?

Investors also pointed to shortcomings that continue to hamper the industry's progress though. Nick Shaw, Deputy CIO at Shell Services International, cites the two perennial bugbears of excessive fees and lack of transparency as the main problems preventing more widespread credibility and acceptability of private equity amongst Europe's investing community.

Adveq's Raschle agrees that greater transparency is needed. This cannot be regulated for though, he insists: ?I believe it is the responsibility of every investment manager to practice this. It cannot be gained by imposing rigid rules across the industry.?

Market-related issues aside, this last point might well be the decisive task for private equity to be getting its teeth into: have a look at this issue's cover story to find out more.