Fund managers see private equity opportunities

The private equity market is starting to throw up opportunities for fund managers looking to buy out cheaper assets.

In the years leading up to the crisis investors tended to buy into highly leveraged private equity deals. But when the recession dried up liquidity these investors were left without enough cash to fund their commitments.

Private equity companies such as JP Morgan Private Equity (JPEL) are now stepping into the thick of the crisis through a secondary fund market and are buying out distressed companies at a discount.

Between 2005 and 2008, the private equity market attracted over £500bn, most of which came from new entrants committing too much money, according to JP Morgan Asset Management.

“Risk appetite is coming back. It’s a good time to buy bombed out assets,” said Henry Freeman at Liberum Capital.

“However, it’s still important to do your homework and make sure that you look at the quality of the manager and the quality of the underlying assets. Some discounts were warranted, but some companies had severe issues.”

He said private equity managers have traditionally been seen to be more secretive with their companies’ underlying financials, but the introduction of listed private equity funds brings more transparency to the market.

“We are in a more honest position now than we were at the start of the year, when we avoided mega-cap buyout funds and heavy gearing. We favoured quality small to mid-cap buyout and venture capital funds with plenty of cash.”

The move into listed private equity has also given everyday institutional and retail investors more exposure to small and mid-cap companies. Fund managers are now able to purchase assets at advanced stages of the deal development.

JPEL expects even more distressed investors to emerge in the next few months, making them a prime buyout. At the same time it is also picking up other companies that have performed exceptionally in the wake of the crisis.

“The secondary approach allows us to go into the life cycle of private equity funds and buy assets that are working, such as healthcare and education,” said Troy Duncan, portfolio manager at JPEL.

Mr Duncan conceded that there is still much unwinding left in the private equity market, citing it as a very “punishing asset class that is often more suitable for investors with a lot of cash.”

However, he said approaching private equity through a secondary market presents vast opportunities for fund managers who are keen to get their hands on cheaper buys.

Robert Corden of Charles Stanley said investors should look beyond the FTSE 100 companies because the best returns in the private equity market follow immediately after the recession.

“Bigger companies are seen as less risky than small companies, but small cap and micro-cap value companies have outperformed large-cap companies by a ratio of three to one. The best area is value, not growth.”