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Dubai. Private equity is finally buying and selling companies again after being virtually halted in its tracks by the credit crisis, but skittish investors and a mountain of debt loom as key obstacles to the industry’s full recovery.

That was the view from top executives from the world’s biggest funds who swept through Dubai this week for one of the industry’s largest conferences, Super Return Middle East.

Executives gave generally confident speeches about how the recovery will play out for the industry. Behind the scenes, they met investors from the oil-rich region to gauge appetite for existing and new funds. Some expressed enthusiasm for investing in the Middle East.

Key to the industry’s success is the basic liquidity in the market to buy and sell companies — which has been extinct since the credit crisis shut off the ability to finance leveraged deals or exit investments already made.

In the past several months, that has changed. Improved equity markets have encouraged private equity companies to launch a small rash of IPOs, sell investments to corporate buyers and even pick up some deals.

“We’ve all been through a trying period,” said Stephen Schwarzman, who runs private equity giant Blackstone Group. “Fortunately, the future looks substantially brighter for us in the private equity business.”

Executives highlighted the improving debt market for deals. Schwarzman said it is possible to do deals of $3 billion to $4 billion. David Rubenstein, joint founder of giant Carlyle Group, said the largest pure private equity deal that could be done right now would be in the $3 billion to $5 billion range. “We’re coming out of the ice age, it’s starting to thaw,” said Jonathan Nelson, CEO of media-focused private equity company Providence Equity Partners.

The crucial market to exit investments and pay distributions to investors has opened, although not all is clear sailing in the public markets. Fortress Investment Group-backed RailAmerica, which owns and operates freight railroads in North America, tumbled 8.3 percent in its debut.

Schwarzman cited five sales from Blackstone’s portfolio — four complete and one imminent — and said he was evaluating the prospects for up to seven IPOs in addition to one, Team Health, already filed. “No one knows how long the window will be open for IPOs. Historically, it’s been a pretty streaky kind of market.”

Among the problems private equity companies are grappling with is a debt mountain from the rush of deals during the boom. Some companies overpaid for deals in the 2006-07 boom and are now facing looming interest payments and sliding sales.

An uncertain economy and volatile markets mean that portfolio companies may see their revenue deteriorate further.

Guy Hands, chairman and chief investment officer of British private equity company Terra Firma Capital Partners, owner of music group EMI, predicted sharp change ahead for the industry, with shrinking fund sizes and diminishing pay.

“Many of the senior people need to work for the next 20 years to make the same amount of money that they made in 2005-7,” said Hands. The days of raising $10 billion or $20 billion funds were over, he said.

Perhaps the biggest issue is raising fresh funds for new deals. Investors over the globe were shell-shocked by the financial crisis and have been risk-averse.

Rubenstein predicted that the industry would transform itself over the next few years as it faces smaller and less-frequent investments, higher equity levels put into deals, higher priced debt and longer holding periods for deals.

“Private equity will probably come up with a new name. It went from bootstrap deals in the early days to leveraged buyouts to management buyouts to private equity,” he said. “Maybe it will go to change capital or value-added equity.”



Reuters