Spotlight 2011: Predictions for the new year

Regulations loom, economic growth will stay slow and huge amounts of un-invested capital will be chasing deals. In some emerging markets like China, a capital bubble may be forming, writes David de Weese.

With no significant recovery in the US economy and slowing growth prospects in much of Europe as the EU’s ‘periphery’ continues to teeter on the brink of sovereign debt default, 2011 will be a year of volatility in public markets for both debt and equity, causing investors to cast a shrewd eye toward minimising risk and bolstering liquidity throughout their portfolios.       

Private equity firms will contend with stricter registration birthed by Washington, DC’s Dodd-Frank Act and Brussels’ AIFM directive while enjoying only slight improvement in a challenging fundraising environment. 

Investor commitments will be smaller and their GP selectivity greatly enhanced.  Large investors will request more co-investment opportunities and separate accounts, thereby increasing pressure on fund economics. The nearly half trillion dollars of un-invested capital in recent vintage buyout funds may lead to lower fund returns as some GPs find themselves paying pre-crisis prices in the race to deploy their capital before their investment periods end. 

Banks, still far from out of the woods, will increase their exits from private equity and other alternative

David de
Weese

assets as they reshape to comply with Dodd-Frank and Basel III, as well as to manage unwanted political oversight. The result will be the beginning of several “boom years” in the secondary private equity market with 2011 transactions exceeding the $30 billion mark.  

Institutional investors will continue to face an uphill slog in difficult economic terrain in the developed world, causing many to move capital into emerging markets. Too many investors may pile into China, India and Brazil, creating the threat of asset pricing bubbles in those countries while other emerging markets will be left capital hungry.   

Finally, Carlyle will go public.

David de Weese is a partner at Paul Capital.