21 August 2007


The proliferation and diversification of deals has become a major focus forinvestment firms as large allocations offunds are distributed globally. The sheernumber of funds and the amount of capitalbeing raised has experienced exponentialgrowth.

In hedge funds alone, there now exist in excess of 8,000 fundsrepresenting an increase of over 1500% in less than 20 years. Indeedmore than $1 trillion USD in assets is under management, whichcomprises a doubling in assets since the 2000 dot com crash.

The derivative of all this capital play is an elevated culture of risk. The growth in debt capacity, historically low interest rates andrelatively calm markets has created an environment whereinvestment activity increases are present in almost every developedcountry in the world.

Further to the point, large institutional investors (superannuation,insurance companies, college endowments, and others) are typicallyallocating a certain percentage of their investments to private equity,hedge funds and real estate with an objective to secure absolutereturns, capital preservation and diversification of their portfolios.

In Australia vendor price expectations remain high and the volume ofdeals has increased although the amount of funds invested isequivalent to only half of funds raised by private equity.

This suggests the amount of funds in the region exceeds the qualityof deals available. Historically, this has lead to a position whereby thequality of companies being invested in decreases as pressure tomaintain a high return on the funds raised increases.

History suggests that 20% of all private equity investments result in awrite off of the initial investment with a further 19% returning up to100% of the initial investment. That makes a total of 39% where areturn on the investment is not received. Private equity sees this areaas one which will need to be monitored as the likelihood of more fattails continues to grow. Fat tails are the catastrophes which comefrom normal day-to-day fluctuations. This is derived from the shapeof a probabilities bell curve. The long, thin tails on both endsrepresent extremely rare outcomes.

US private equity investments over the past twenty years:

The shortage of deals resulting in some riskier investments togetherwith the historic failure rate has led to an emerging trend in the US ofspecialist Turnaround Management firms being engaged more andmore to assist with deal vetting, monitoring, repositioning and valuemaximisation. Not only are they experienced in assessing businessviability but they can also identify areas of underperformance in abusiness and implement sustainable strategies to rapidly improvecash flow as well as earnings, the very basis upon which a privateequity firm’s exit strategy is based on.

What remains to be seen is whether the Australian private equityindustry will follow the lead of the US and engage the skills ofspecialist turnaround consultants not only to help mitigate risk butalso to ensure that the business plans upon which exit strategies arebased are achievable and possibly surpassed.

If you would like to discuss this topic in more detail please feel free to contact us.


Michael Fingland
Managing Director

M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765
Level 5, 247 Adelaide StreetBrisbane QLD 4000



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