According to a report in the Wall Street Journal by Amy Or, private equity firms are going all out to protect the businesses of their investee companies in Europe from the fallouts of the debt crisis, which could include slowing economic growth and austerity measures that could decrease spending.
One step has been to refinance the debt of portfolio companies or to otherwise prop up their capital structure. Given that banks have become increasingly risk averse and liquidity may be at a premium, these are measures that could sustain these investments over the course of a long slowdown. In fact the non-availability of traditional financing for certain deals resulted in KKR & Co. (KKR) taking the unconventional route of long-term bonds to raise funds.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
With over $220 billion at stake in private equity investments on the Continent, the current situation is fraught with political, economic and currency risks.
The volatile currency markets have taken their toll on private equity investments as hitherto stable currencies lost value, thereby depreciating the value of the equity investments in dollar terms. KKR’s investment in Alliance Boots is a case in point – it made an investment of $2.45 billion in 2007 which is currently worth only $1.8 billion dollars due to the fall in the value of the pound.
Hedging is not a route favored by most private equity players given that their investments are held for fairly long periods of time and the size and time frames of their liquidation are unclear.
In an interesting view of the problem, New York Life Capital Partners’ Managing Principal Quint Barker says, “We don’t take directional macro positions. If Germany leaves the euro zone, the euro may collapse, if it’s Greece, the euro may rise. Our expectations are that over the life of a steady program, the benefits and losses from currency will balance out.”
The other solution is to find companies that possess an inherent shield to the country’s macro-economic problems. For example, Dominique Gaillard, AXA Private Equity’s managing director of direct funds, says such opportunities may still be located in Italy. AXA also looks at non-cyclical investments that can weather such storms, such as investments in senior care and rehabilitation services, healthcare and hospitals.