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Downturn forces private equity firms to hold companies longer than expected

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GLOBAL - Private equity fund managers involved in company buyouts have been forced to hold their portfolios for longer than initially planned in order to extract the desired value in the financial downturn, a report by Preqin has found.

According to Preqin, the fact that many transactions made in 2007 and earlier are still not sold suggests that many fund managers active during this period have been negatively impacted by the financial market turmoil, holding therefore their investments instead of exiting them.

Preqin nonetheless noted in its research that the current low level of buyouts also needs to be put into perspective, as the unrealised portfolio value held by the industry comes as a result of the prevalence of large deals made during the buyout 'boom period'.

The report showed that in 2006-07, the industry saw an exceptionally high level of deals with around $1.3trn (€1trn) worth of private equity-backed buyout transactions. Such records have been unequalled since then.

However, the report revealed that buyout fund managers have made exits whenever favourable market opportunities have arisen since 2007.

Therefore, in the second quarter of last year, around $130bn worth of exits were recorded.

Manuel Carvalho, manager private equity deals, said: "Many buyout fund managers were extremely active deal-makers in the years preceding the financial crisis, with record levels of buyout activity registered during the 2006-07 'boom era'.

"For much of the period since, however, we have seen sustained periods of unfavourable exit conditions, and we have consequently witnessed some portfolio companies being retained for longer than originally intended to ensure that attractive returns can be provided to LPs [limited partners]."

Carvalho went on to say that investors in buyout funds can nonetheless be reassured by the fact that fund managers are making the most of any exit opportunities and investors will begin to see further distributions as soon as conditions are favourable enough for fund managers to sell at the right price.

Once those exists will have taken place, Preqin expects industry assets under management to decline in the short term as these companies are sold but as distributions filter back to investors, capital will be fed back into private equity funds through new commitments.

Preqin also noted that the primary concern for LPs is whether the asset class can still offer strong returns. 

According to the report, while the onset of the financial downturn and the introduction of mark-to-market valuations in 2008 saw a steep fall in value in the short term, the asset class as a whole has been in a state of recovery since that time.

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