Partner Article

Emerging economies provide attractive divestment avenue

Private placements in the financial services sector in Europe declined 30% in 201, compared with 2010.

Research from Frost & Sullivan found the average deal size of the sector has decreased, which indicates a decline in investor confidence.

Financial Analyst at Frost & Sullivan, Sheetal Kothari, said: “Last year banking and insurance witnessed a fall in private equity activity.

“The average time taken to raise funds has also significantly increased by more than 80 per cent (11 months to 20 months) from 2006 to 2011. Additionally, there were fewer number of funds raised in 2011, compared to the fundraising cycle of 2005–2008.

“Due to sluggish growth and increasing risk in developed economies, fund raising will continue to be a challenge in 2012–2013.”

“With an unsustainable amount of dry powder funds, private equity firms are facing increasing pressure to use the money raised in the previous fund cycle.

“However, distressed companies are reluctant to sell out during the current economic uncertainty because of problems regarding correct valuations of their companies.

“The reasons for the decline in activity are weak financial and capital markets, low investor confidence, credit downgrades and the Euro zone crisis, all of which have resulted in investors looking out for new avenues and other sectors for investment.”

Frost & Sullivan suggest that while many limited partners are reassessing their current investment allocation in the private equity industry, it is becoming increasingly important for general partners to look beyond their usual sources of capital.

2011 statistics indicate that Asia and the rest of the world have accounted for 22.4% of the annual private equity funds raised globally.

This is compared with 8.6% in 2003, and about 15.9% of committed capital in 2006 from the same region.

Sheetal added: “Emerging economies provide an attractive avenue for divestment to investors who are willing to broaden their scope.

“These countries have greater fundraising opportunities and greater scope for growth when compared to developed countries in the current economic scenario.”

This was posted in Bdaily's Members' News section by Tom Keighley .