Robust business in a tricky market

The European LBO pipeline is building up, warn bankers, and the reluctance of institutionals to embrace this type of deal is limiting liquidity. Euroweek reports.

What a difference a year makes', said Loren Boston, managing director with SSB’s private equity group, welcoming delegates to the bank's second annual private equity conference.

Over 300 private equity managers, intermediaries, investors, gatekeepers and placement agents had gathered last week at Miami’s renowned Doral Golf Resort to share news, views and opinion on the changing face of private equity. Although many were US based, Europe was clearly high on the agenda and by the end of the meeting few were left with any doubt that in many respects, Europe was where it was at.

A high caliber line up of speakers included SSSB’s Michael Klein, David Bonderman of Texas Pacific Group, John Canning of Madison Dearborn Partners, Nomura’s Guy Hands, Nigel Doughty of Doughty Hanson and Tom Hicks of Hicks, Muse, Tate & Furst.

Loren Boston's opening comment was referring to the bank’s inaugural private equity meeting a year ago that had taken place at the very height of the bull market. This time round, things were indeed a little different, with many delegates taking time out of their coffee breaks to check the Bloomberg terminals in the lobby for the latest news from the Street.

Whilst the market may have been unpleasant, it certainly didn’t spoil the party. In a fiery opening speech Michael Klein, SSSB’s vice chairman, co-head of Global Investment Banking and head of the bank’s private equity operation, introduced many of the key issues debated over the course of the conference. Discussing the superiority of private equity as an asset class, Klein praised its “very robust business model”. The inherent strength of this model he saw in giving managers active control over their investments and hence maximum optionality to choose from a broad range of tools both pre and post exit.

Klein went on to say that private equity, “late last year effectively the only market open for business”, was to become even better positioned to exploit opportunities in the future. A major factor driving the industry forward was the emergence of a leading tier of global, increasingly institutionalised private equity managers, he said.

However, for the industry to fully come of age, there was still a need for better performance data and transparency. “The gulf between top and bottom quartile performers has widened dramatically, so what we need is better, more critical research into investment performance.” The bank was itself contributing to this through its research project led by Josh Lerner and Paul Gompers.

Next up on stage was Texas Pacific’s chairman and CEO David Bonderman. To illustrate how the perception of private equity managers had evolved from the corporate raider image of the 1980s to highly regarded investment professionals, he told the story of a party he had recently attended. Tina Brown of Talk Magazine had invited an illustrious cast of stars, amongst them Barbara Streisand. And guess what the entertainment was, Bonderman asked : 'Jack Welsh talking about why LBOs were good for America! How things have changed.”

On a more serious note, Bonderman shared Klein's view that private equity was set to grow in significance, but warned that “traditional funding mechanisms are unsustainable.” As traditional investors in private equity were revising their allocation strategies, general partners would have to look for alternative sources of capital. This was another theme that found great resonance with delegates. Loren Boston later chaired a panel of institutional investors addressing this and other concerns affecting the relationship between the buy and sell sides.

We thought you would be interested in hearing from some of the key people at the conference so here are the highlights of our exclusive coverage.

Click here to find out why Tom Hicks, when facing uncertainty over the value of his firm’s New Economy portfolio, chose to give investors a guarantee that they would get their money back no matter what. For a first hand account of how Guy Hands runs Nomura’s Principal Finance Group, click here.

And for an update on the opportunities available to private equity in the telecommunications sector, watch the interview with Eduardo Mestre, vice chairman and head of investment banking with Salomon Smith Barney.

Brian Finn of Clayton, Dubilier & Rice and Leonard Green's Peter Nolan and Chip Schorr of Citicorp Venture Capital discuss life in the LBO market, and J. Crandall talked us through the way his firm, Oak Hill Capital Management, uses a number of alternative investment platforms to bolster its private equity business.

Click here to view the conference agenda.