Private equity must help fix current problems in the world's credit markets by doing everything in its power to repair the balance sheets of aggressively leveraged portfolio companies.
This was the message delivered today by Hugh MacArthur, head of global private equity at consulting firm Bain & Company, to a gathering of international private equity professionals at PEI's 5th Annual Middle East Forum in Dubai.
The majority of private equity firms have so far only been paying lip service to operational improvement.
MacArthur described private equity as one of the main beneficiaries of the liquidity boom, which now meant the industry had a responsibility to help deal with the consequences the credit binge had brought about.
As part of this effort, private equity should be supportive of regulation aimed at limiting the use of leverage in buyouts, MacArthur added. “The industry has shown itself incapable of self-management in using leverage sensibly,” he said.
Patricia Cloherty, founder and chief executive of Russia-focused mid-market investor Delta Private Equity Partners, sat on the same panel as MacArthur. A 40-year private equity veteran, she told the conference: “For as long as I have been in this business, there has been a liquidity bubble every decade. And there will be another one after today's. Cheap debt is simply seductive, and everyone is complicit on the upside.”
Cheap debt is simply seductive, and everyone is complicit on the upside.
MacArthur also urged general partners to work closely and actively with portfolio companies to bring about value-enhancing operational improvements. “There are some well-known exceptions, but the majority of private equity firms have so far only been paying lip service to operational improvement as being a part of their strategy.”
He said now that purchase price multiples were contracting and portfolio companies getting hit by the recession, operational improvements were absolutely essential if sponsors were to preserve the capital they invested in pre-crisis deals – “never mind delivering returns” on 2006 and 2007 vintage investments.
MacArthur also argued the nascent private equity industry was still poised for significant growth in the long-term, provided it managed to overcome today's difficulties. “The industry should face the future with optimism,” he said.