| ||||||||||
| ||||||||||
— Private Equity —
 Is the glass half-empty or just half-full? Even as they are united by the adversity of plunging asset prices, U.S. and European private equity firms take quite different approaches to valuing their shrinking portfolios. The Europeans are typically more generous in their valuations than their American counterparts, which has given them an edge in appeasing both investors and creditors. But that advantage may prove short-lived. By the end of this year, European buyout shops may be forced to take painful asset write-downs. If the recession deepens, and if the European Union enacts regulations governing financial disclosure for private equity and hedge funds, an already bleak outlook for investment performance will look decidedly worse.
"U.S. guidelines are more rule-based than their European counterparts," says James Palmer, a director and specialist in private equity valuations at financial advisory firm Duff & Phelps Ltd. "U.S. firms rely on an 'exit price' concept while Europeans use a 'willing buyer, willing seller" model. In the current market this has led to write-downs in the U.S. to market prices that are based on illiquid markets or distressed sales," Palmer says. Not all European PE houses endorse the more flexible willing buyer, willing seller system. Paris-based Apax SA, for one, uses a valuation approach that is something of a U.S.-European hybrid. Says Maurice Tchenio, Apax SA chairman and CEO, "We mark our assets to market and then, for unlisted assets, apply a conservative discount of an additional 30% to reflect the illiquidity. ... That is a robust and transparent method, which is the basis of any meaningful reporting." The depth and length of the downturn in the market and the economy will likely decide the wisdom or folly of the European system. If asset prices rebound later this year and in 2010, then willing seller will be hailed as a means to smooth out market excesses. If the bounce fails to materialize, or if European private equity houses become forced sellers, then the disparity created by the European system will be exposed. As it is, write-downs of assets in the coming year seem inevitable. Since the end of 2008, when most private equity firms close their books, stock markets have fallen further, putting pressure on the earnings multiples that are used to value holdings. As well, with many of Europe's economies dipping into recession at the start of 2009, earnings themselves are also coming under pressure. "Across a range of portfolios we have seen, falls in asset values of 30% to 35% are fairly typical," says Duff & Phelps' Palmer. Europe's largest listed private equity firm, 3i Group plc, in January estimated that its 50 largest investments had shed 21% of their value in the fourth quarter of 2008 alone. The portfolio value of London-listed Candover Investments plc slumped 50% in 2008. Paris-listed Eurazeo has experienced a drop in its its market value of 65% in the past year. Further declines in asset prices will focus creditor and investor attention on valuations at a time when regulators are training their sights on private equity reporting methods. The EU earlier this year announced plans to introduce new regulations mandating a consistent level of disclosure for private equity and hedge funds operating within its borders. An initial draft of those rules is due for release on April 21. The regulations are expected to include requirements that private equity shops provide national regulators with details of their holdings, fund risk profiles and information on how they value, and how often they will value, their assets. The new rules may be especially tough for U.S. firms doing business in Europe. Yet European PE lobbies were concerned enough to attempt to head off the new legislation with proposals for greater voluntary disclosure, an offer that was rejected by the EU's competition watchdog. Not every European PE chief shares those concerns. "If we [the private equity sector] want to be accepted as responsible actors in the economy, then we have to pursue the highest-quality reporting practices," says Apax'sTchenio. "It is in our interest, and it is the right thing to do." |
|
|
|
|
|
