A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2008

INDUSTRY OVERVIEW

We can distinguish credit opportunity funds that purchase debt or loan obligations based on their assessment of underlying credit quality, from distressed debt control funds which aim at assuming control and thereafter restructure the companies’ capital structures and operating models 13 .

Figure 9: Evolution of distressed private equity fund raising (1992-2008)

$47bn

$45.2bn

Liquidity Crisis

$17.3bn

$12bn

$8.5bn

Tech Crisis

$7.8bn

Asian Crisis

$4.4bn

Aggregate capital raised in $bn

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Preqin Ltd, 2009

A weak economy generally creates increased investment opportunities in distressed debt, as displayed by figure 9, contrary to other private equity strategies and instruments such as buyout, venture capital or mezzanine investment, the returns of which are generally posi- tively correlated to economic trends. Hence, the current economic crisis has led to an in- crease in opportunities for distressed private equity firms, as it had already been the case during the Asian crash and the dotcom crash. The distressed private equity share in the overall industry increased from less than 3% in 2005 to more than 9% in 2008. Private equity real estate typically involves a private equity firm collecting money from in- vestors to create a private equity fund, which then looks for potentially profitable real estate to purchase. The private equity fund creates a portfolio of real estate investments that the fund manager believes will be relatively low-risk while still lucrative. The private equity real estate industry dates back to the 1980s but recent years have seen private equity real estate funds grow, in terms of number of funds on the road and in terms of aggregate target, from being a niche sector in the real estate asset class to being an important and essential component of any institution’s investment portfolio, as displayed in figure 10. Private equity real estate

1.2.5

13 Source: Investment & Pensions Europe (IPE), Special Report Private Equity, “A time of difficulty and opportunity” by Nick Chronias, April 2009

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