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The private equity industry is going global. Just as investment banks raced to grab a share of overseas markets in the 1990s – spending vast sums of money along the way – the big private equity firms are setting up new offices around the world. The prize: the kudos and deal-making power that goes with being part of a small global elite.
As in the case of the investment banks, there will only be half a dozen or so winners and most of them will be American. Some, such as Kohlberg Kravis Roberts and Blackstone, have already made it. As ever, the Europeans have been playing catch up: Permira and Apax look the likeliest to win places in the global “bulge bracket”. Some won’t try but will find profitable niches instead.
What about the losers? In the 1990s, banks that failed to make the grade in the global markets either were bought (Donaldson Lufkin Jenrette, Schroders, Warburg) or lost some of their cachet (Cazenove, Lazard). Even the winners, such as UBS and Deutsche Bank, spent a lot of time and money getting there.
In private equity, a wave of consolidation is unlikely, since mergers are tricky, culturally and structurally. Thanks to a more forgiving business model there may be fewer casualties than in banking. The expansion costs for private equity firms – an office and a few well paid but temporarily unproductive staff – are, relatively, tiny. Conveniently, this investment can be funded by increased fees from record-size funds, without depressing partners’ current earnings.
The global winners expect to enjoy a virtuous circle: more money to invest and a broader reach will bring the pick of deals and the biggest fees. The main danger for the aspiring global funds is that in their haste to grow, they will raise more money than they can invest sensibly or take on too much leverage – surely a temptation, given the apparently limitless amounts of debt currently being thrown at them by banks and hedge funds. Firms which do bad deals may not die but, like Forstman Little and Hicks Muse Tate & Furst, they will slowly fade away.