Many speculate that the buyout sector had a significant degree of responsibility in overheating the market and fuelling the recent financial bubble. Looking at the amount of cash historically distributed by buyout houses back to investors, the enthusiasm for buyouts is perfectly understandable. During the years 2004 to 2007, the buyout industry was distributing much more capital than it was investing even if fundraising and deal activity were growing rapidly at the time.
2007 followed the same trend, distributing the largest amount of capital ever, but the crisis abruptly stopped both distribution and investments. In 2008, the buyout industry reached a standstill, investing less than $150 billion and only distributing $63 billion back to investors. Additionally the unrealised value of portfolio companies increased threefold between 2000 and 2007 but decreased by $69 billion in 2008.
Private equity has already survived several major crises, including the tech bubble that profoundly transformed the venture capital industry. Today’s new challenges, the credit crisis and the introduction of FAS157, are likely to alter the industry dynamics once again. The common consensus is that the crisis might also offer exceptional opportunities for private equity.
Compared to public markets, private equity remains a high performing asset class and many signs indicate that the industry will bounce back and take advantage of the situation.
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