KEY POINTS:
Private equity investors can expect to see lower levels of return on their investments as the markets return to "normal", according to a visiting expert.
Sally Collier, a London-based partner at global private equity firm Pantheon Ventures, was in New Zealand this week to talk to high net
worth investors of Pantheon's parent company Russell Investment. Pantheon manages more than US$19.8 billion worldwide across 700 private equity funds.
She said many investors were concerned about the credit crunch and how it would affect the private market.
Private equity was designed to give investors a premium over investing in public companies and the logical conclusion was that if returns from the public market were down so would private market returns, she said.
"If you expect the underlying public market to come off - you would expect private equity returns to follow." She said the increase in the cost of debt meant that private equity investment funds would not be able to turn around their investments as quickly as managers were taking longer to invest and were also holding on to investments longer.
Private equity funds typically buy into companies and hold them for three to five years before selling them on. Collier said over the past few years it had been more like two to three years.
"What we have seen over the last couple of years has been on the other side of normal."
She said private equity investment was now returning to normal with a general slowing across the entire market. "There has been a slowing overall but it is more pronounced at the top end of the market." However, lower company valuations meant there were good opportunities as well.
"Most of the managers do think it is a good time to invest. Valuations are down. There are less buyers out there because of the cost of debt."
Asia, in particular, was being seen as a good place to invest as many of the companies were growth opportunities and less debt was needed to buy into them. But the biggest challenge for private equity managers remained the cost of debt - a key reason why growth was expected to be mainly in mid-market transactions.
"That area of the market is more about relationship banking. In the big transactions the banks are relying on syndication. For the smaller transactions they don't need to do that."
Collier said big transactions in New Zealand and Australia were even less likely as the cost of debt had become higher with increases in the interest rates by both reserve banks.
In Europe and the US the cost of debt had stayed the same because interest rates had been dropped.
"What we have seen is a repricing of risk," she said. "Debt risk got too cheap."
Despite the volatility of the markets, Collier said individual investors were not pulling their money out of private equity funds.
"We haven't seen too many investors leave as most understand it is a long-term investment."