Private Equity Funds - The Coadjutant Capital Rich Investors Shape the Way
Globally it is becoming increasingly discommodious to raise capital through public fund raising (IPO's). The costs of going public are escalating year on year. Costs relating to meeting SEC requirements and of getting timely and proprietary research coverage is rising. The demand of IPO's has been volatile in 2006, with the backlog of IPO filings rising. High disclosure norms and postulations from public, government, and press is leading to high correlation of company results with markets, companies are impelled to amenably meet or beat quarterly revenue and earnings estimates. Furthermore, increasing scrutiny surrounding public companies and corporate governance is corroborating the cause of companies to stay private.
The ample liquidity and cheap debt available in the market has propagated many institutions, large retail investors, government agencies, pension funds, insurance companies, universities etc to consider investing large sums of money. Most of these companies prefer the 'private equity' route, as the returns from these investments have been stupendous, beating the benchmark S&P 500 three times, as well as returns exhibited by mutual fund and market investments. This has led to a smart upsurge in the PE driven M&A activity.
Last year surmounted all erstwhile years in terms of value and number of private equity fund raising. Venture capital funds and buyout funds raised $28.3 billion and $102.9 billion in 2006 vis-a-vis $28 billion and $96.1 billion in 2005 respectively. US Pension funds allocated approximately 6% to private equity last year. 42 of the Fortune 1000 companies were acquired.
Private equity capital infusion provides start up financing, research and development, resolves cash flow problems, and funds requirement for additional growth capital essential to a business. It resolves the succession issue for companies and lends visibility to the organization. Hence, they help in enhancing the value of the organizations, increasing long-term employment and enable them to enhance their value and benefit the stakeholders. They also provide valuable management strategies and techniques accoutering them an edge over rival private/ public firms. Additionally, they also help in ameliorating the society by creating long-term employment opportunities, and secure retirements leaving more money in the hands of the state to carry out welfare activities, without the encumbrance of increasing taxes. This is probably the reason why news of private equity capital infusion in a company, brings significant buying interest in its stock.
The focus is now on companies with high cash flows and lower valuations with a stronger bias towards new and emerging markets in Asia, as the mature markets are consolidating. This is substantiated by the fact that globally private equity funds raised $37.1 billion for investment in Asia Pacific companies in 2006. More recently, Bain Capital raised a $1 billion Asia fund and CCMP is targeting to raise a $3 billion Asia opportunity fund. Sectors eulogized by dealmakers include financial services, pharma, health care and homebuilding.
In conclusion, private equity players with their burgeoning capital reserves are here to stay and bask in profits.