Private Equity Firms Remain Optimistic Despite Economic Downturn

Apr 25 2008 | 10:56am ET

Small- and mid-market private equity firms say that the U.S. economy is in a downturn, and that an extended period of market uncertainty would adversely impact p.e. firms. However, they remain optimistic about their own prospects and have generally set aggressive fundraising targets for 2008 and beyond.

According to a new survey of 323 managing principals of p.e. funds by Rothstein Kass, most respondents are doubtful of a quick turnaround, with nearly 70% believing the credit crisis will continue to worsen through 2008. But just about all surveyed expressed an interest in raising more assets for their funds.

“The ultimate success of any private equity firm is dependent on its access to capital and its ability to find suitable transactions,” said Steve Kass, co-managing principal of Rothstein Kass. “Because of the intense competition they face from larger players, investment banking operations and increasingly, from the alternative investment community, smaller and middle market firms are often among the first and most deeply impacted by prolonged weakness in credit markets.” 

Some 85% of those expecting a severe downturn think hedge funds will interfere with their efforts, while only 28% anticipating a mild downturn agree. Only 21% of respondents see more private equity funds being launched in 2008 and about 40% of managing principals expect traditional loans to replace private equity investments among young or struggling firms.

“Throughout their development, small and mid-market private equity firms have had to contend with competition from a variety of sources, including multi-billion dollar, global funds with strong brand recognition,” said Tom Angell, principal of the national commercial services group of Rothstein Kass.

“To effectively compete against the private equity behemoths, many middle market firms have been compelled to carve out practices in niche markets, often developing a level of specialization and expertise that surpasses that of larger counterparts.”


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