Private Equity Firms During the Credit Crisis

Through Global Finance magazine, I was directed to a white paper on Merrill DataSite called Riding Out the Storm:  How Private Equity Firms Survive and Thrive During Tough Economic Times.  The global recession that began in 2007 change private equity investment conditions drastically.  Financing deals grew more expensive as banks tightened their loan procedures.  Company valuations declined as the equity markets tanked.  Deals fell apart.

The private equity firms that did well during the recession followed these basic practices:

• Apply sound business discipline to their investment practices
• Good personnel
• Portfolio diversification
• Have proprietary deals
• Overseas investments
• Stellar professional reputations

The firms that did not do well made these mistakes:

• Difficulties fund-raising
• Lack of due diligence on portfolio companies
• Pay too much for debt
• Did not add value to portfolio companies
• Disorderly change of management at portfolio companies

In the future, the paper concludes that private equity firms should concentrate on their core strengths, reduce their debt and practice honesty and fairness to weather the next economic crisis.