Fund raising of PE firms set to dip

Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to the 2012 Global Private Equity Report, released by Grant Thornton. Sharing his views, Harish H V - Partner, Corporate Finance, Grant Thornton in India said, “Private equity in emerging markets is challenging because of the governance risks and the absence of deep capital and M&A markets to enable exits. An understanding of the local situation is key to success in these markets.”

This year’s report sees a decline in fundraising expectations of GPs around the world, with about 72 per cent describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 per cent. The most dramatic decline in optimism from 2011 is evident in the BRICS (Brazil, Russia, India, China and South Africa). This year, 78 per cent of respondents in these markets described the fundraising outlook as “negative” or “very negative”. In 2011, the figure was 39 per cent.

Commenting on the fund-raising scenario, Harish H V stated that India has fallen from its high pedestal of being one of the markets where fund-raising was considered easy. This is the result of the experience that PE funds have had in India and also the ‘policy paralysis’ of the Indian government. The fund-raising figures show a high percentage of negativity as the survey was conducted between June and September when some of the new reform measures were not announced.

PE firms expect to have to turn to a greater number of new investors — or limited partners (LPs) — and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 40 per cent of respondents said they expect their next fund to be majority funded by first time investors. In 2011’s report, this figure was only 24 per cent.

“Though fundraising remains a key challenge, for those with a good track record, a coherent strategy and a quality team that can deliver that strategy, fundraising will be more straightforward.

This evolution will see a widening of the gap between the successful and less successful firms and inevitably winners and losers in the industry, as raising funds for those underperforming firms becoming increasingly challenging, if not impossible,” said Martin Goddard, global service line leader, transactions, Grant Thornton International.

Private equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents (52 per cent) expect the majority of the trade buyers they transact within the near term to be foreign, while a further 20 per cent expect the split between foreign and domestic buyers to be 50-50. Only 28 per cent expect to deal mostly with domestic trade buyers. Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate.

Many private equity executives expect both China and India to suffer a decline in deal activity in the next 12 months. This represents a dramatic turnaround in sentiment for both countries. In 2011, 78 per cent of respondents expected investment activity in India to increase, with the remaining 22 percent expecting it to remain steady. This year, 45 percent expect it to decline.