Mixed outlook for PE in 2012

Uncertainty surrounds global private equity industry in 2012 as investors cautiously watch development in the international economy.

In 2011, the Eurozone crisis dimmed what was earlier seen as a promising year. In its latest report, research firm, Preqin, indicates that in the first half of the year, trends in fundraising, deals and exits were healthy looking before the turmoil struck.

A survey by Preqin found out that the industry’s outlook for 2012 “remains relatively positive.”

However, not everyone in the industry is that optimistic. For private equity firm, Citadel Capital, this year is unlikely to be different from last year. According to the firm’s founder and chairman Dr Ahmed Heikal, “2012 is giving every sign of looking a lot like 2011.”

Last year, a political uprising rocked Citadel’s Egypt base, culminating in a regime change in the country. This put on hold its plans to divest from its portfolio companies.

Dr Heikal told a recent World Economic Forum gathering in Davos, Switzerland that his firm has so far raised over $300 million in equity and debt for its platform companies, while adding $325 million in fresh cash to its balance sheet despite investor flight immediately after the Egyptian revolution last year.

“We did this because we have built viable businesses that create value for our investors by offering solutions to pressing national challenges,” Dr Heikal noted.

This was one of the few silver linings in what was largely a dark cloud for private equity last year.

Not that these things have totally changed now. There are prevailing drawbacks, such as a crowded fundraising environment.

The report by Preqin estimates that as at January, there were over 1,800 new funds scrambling for the attention of investors. This could keep the fundraising market crowded, the report warns.

“This will particularly be the case if the lack of exit opportunities available to fund managers continues, as it will lead to investors receiving low levels of distribution from existing investments. Consequently, it will reduce the pool of capital available for new commitments,” it adds.

However, according to the report, the fund managers who can demonstrate a strong track record, position themselves correctly, and have access to the best intelligence, are more likely to be able to stand out in market and would still remain successful in attracting capital.

“Institutional investors may generally be much more discerning regarding fund selection, but the investor universe as a whole remains optimistic and committed to the asset class,” the report states, adding that private equity fund managers hope that wider market conditions will improve in 2012, which would allow for the sale of retained investments.

It however warns that should exit conditions remain difficult, fundraising will likely decline further as institutional investors await distributions from their current investments and look to avoid becoming over-allocated to the asset class.