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Private equity caught in 'transition' in H2

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EUROPE - In the second half of this year the buyout market will be caught in a transition period and the private debt sector will see a correction, Swiss alternative asset manager Partners Group has predicted.

In its most recent Alternative Assets Navigator, the group argues the rising risk aversion under the recent market turmoil has reshuffled the private equity landscape and predicts that the buyout market not only faces a correction, but will experience a period of disconnection between financing terms and pricing.

Forecasting the movements of alternative asset classes for the second half of 2008, the navigator finds it a paradox that the cost of financing has risen significantly for a multitude of reasons sparked by the credit crunch, while prices in the sector have not adjusted.

Speaking of an "entry price conundrum", the group said "we stated in 2007 that prices were too high - yet entry multiples have in fact increase further to 10x on average instead of retreating" .

Still, Partners sees attractive opportunities on the secondary market and expects this trend to continue.

There will be a shift towards emerging Asian markets as investment opportunities are opening up, and the group spots a "robust" deal flow and adjusted price expectations in the lower-mid and small cap segments.

Private debt, on the other hand, will see what the group calls a "healthy correction" in the second half after a period of muted risk aversion and record low credit margins, producing an improved balance of risk and return.

Partners Group has also released its prediction on absolute return strategies, arguing investors should continue to seek absolute return strategies.

The organisation warns, however, an optimal portfolio includes risk premium-based liquid portfolio components, less liquid systematic exposure such as insurance-linked securities or real assets, private capital market investments, and liquid alpha-generating hedge funds.

"What is needed for the next step of alternative asset management is the emergence of a holistic perspective on investing instead of restriction to particular asset classes and return drivers," concluded Partners.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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