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Six years ago, an all-woman team from Goldman Sachs, the US investment bank, showed up at a pitch to advise on the private equity sale of Jimmy Choo, shoemaker to the wealthy, wearing the company’s luxury stilettos.

On this occasion, Goldman lost out to its rival Rothschild. This year, however, with the cordwainer eyeing another sale, Goldman presented its pitch book to the company’s new private equity owners in a bespoke Jimmy Choo shoebox, helping it finally to win the mandate.

Jimmy Choo is an example of how a series of private equity deals can propel a small, London-based company to a global fashion brand worth £500m ($780m). And while the marketing antics of investment banks have hardly changed in recent years, there is little doubt that the private equity industry has been through considerable upheaval – and more is expected in the years to come.

After a “golden age” of rising markets, mega-deals and bumper profits, the financial crisis brought the private equity bosses crashing back to earth. As debt dried up, so too did the deals. From roughly $500bn of buy-outs a year in 2006 and 2007, there were only $81bn-worth in 2009 and a similar amount so far this year, according to Thomson Reuters. Short-term returns at private equity groups have turned sharply negative as many of the “mega buy-out” deals from the credit bubble struggle under heavy debts. Investors that gorged on private equity during the credit bubble are now suffering from a serious bout of indigestion.

Fundraising, the lifeblood of the industry, has dropped from a peak of $646bn in 2007 to just $286bn in 2009 and $157bn in the year to September 15, according to Preqin, the research house.

As the industry adjusts, firms will live or die on their recent track records. “Lemons ripen before peaches,” says William Jackson, managing partner at Bridgepoint, the private equity group. “Most times, if a fund is going to be an absolute disaster, it is pretty obvious early on.”

He adds: “The reason we are such a strong asset class is that every four or five years we have to go to our investors and ask for their money again. But I think most funds raised in the coming years will be smaller. That just reflects the market.”

Amid the doom and gloom, however, some private equity companies are optimistic.

BC Partners last month started raising a €6bn ($7.9bn) fund, the biggest since the upheaval caused by the collapse of Lehman Brothers two years ago.

At the same time, there has never been more money sloshing around the industry. At the end of 2009, private equity had $1,071bn of committed capital that was still to be invested, of which roughly $500bn was for buy-outs. Time is running out before this capital must be either invested or returned to investors.

“To make investments in 2008-09 was very hard, so this was a lost period for many private equity firms,” says Charlie Bott, head of investor relations at BC Partners. “The key is now to spend the capital available effectively.”

In response, some private equity groups are doing different types of deals from the traditional western leveraged buy-out. These include buying minority stakes, such as CVC Capital Partners taking a 15.5 per cent stake in Spanish infrastructure group Abertis, or investing in emerging markets, such as Carlyle’s recent Brazilian acquisitions of health insurer Qualicorp and lingerie maker Scalina.

In addition, many private equity groups are fishing for deals in each other’s portfolios. More than half of the nearly €20bn ($27bn) of European buy-outs in the first six months of the year were “pass the parcel” deals between buy-out firms – a new record, according to the Centre for Management Buy-Out Research at Nottingham University Business School.

With a wall of buy-out money chasing deals, some believe it is a great time to sell. “It is a phoney war,” says Charles Ind, managing partner at Bowmark Capital. “Last year, nobody wanted to buy and nobody wanted to sell. Now everyone wants to buy, and not many want to sell, except those with resilient assets. So, it’s a feeding frenzy.”

But at the current rate of investment it would take almost a decade for private equity to invest all its dry powder. William Charnley, a lawyer at Mayer Brown, says: “Some of the big firms will not be able to raise a fund of the same size in the future, because investors will say you have shown you can’t spend that much.”

The biggest US private equity groups, such as Blackstone, Kohlberg Kravis Roberts and Apollo Management, are listing themselves on the stock market and becoming more like investment banks by diversifying across capital markets.

While these goliaths of the industry seek to expand, many expect the broader private equity industry below them to shrink.

New regulation – such as Europe’s Alternative Investment Fund Manager directive – and government attempts to close some of the tax loopholes the industry enjoys will add to the pressure.

Bob Long, chief executive of Conversus Capital, a $2.5bn fund of funds, says the upheaval has a long way to go: “This is still an industry that is 30 years young, so it is still developing and evolving. There will be a shake-out, but it will take a long time.”

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