Who moved my cheese!

This is one other blog dedicated to Private Equity alternatives and difficulties faced by the PE business in this period of stringent credit!

Having worked in the middle-east for a year now, I certainly believe that the next wave of private equity would come from economies having sufficient current account surplus and a vision to spend on utilities, infrastructure and improving weaker area's of the economy. However, as of now, private equity in the frontier markets seems to be taking a bit of breather. I say this as an insider who see's capital pool bring dried up for new launched/to be launched funds in the Middle East. Interestingly, my boss was perplexed this morning as to why Private Equity fund raising was not picking up for Middle Eastern firms? The answer to this is simple - however, complex it might be - Hedge Funds are eating the Private Equity cheese!

Let me explain how:

If I were to open my calendar and look at the hedge fund managers I have met in the year 2008, I find that amazingly 75% of the managers who met me represent a distressed or high yield strategy within the HF strategy universe. And now let me you what these guys are doing that making the PE fund raising more and more difficult. Due to the recent credit crisis, we see that in the developed world, bonds are trading at a significant discount to par. Due to the recent sell off in the convetible markets, one can find convert's trading anywhere between 65 - 75 cents on a dollar making the current yield go upto 15%-25% in most of the cases. Similar scenario is being witnessed in the senior secured market, where paper of fundamentally good companies are trading between 50-60 cents on a dollar relaizing a current yield of 10%-15%. Hedge funds managers have been waiting for this opportunity since long and finally it has arrived. Investors have also become smart; imagine you pay 65 cents for an asset that yield 8 cents for 3 years with a guarantee of getting a dollar back - this trade yields you 26% annualized over 3 years. Tell me would you want to go for a private equity investment or invest in a 26% annual bond of a listed company in developed markets? I am sure you are smart enough! Hedge funds exploiting this opportunity at the moment are raising tremendous pool of money. Recent estimates suggest that High Yield managers are raising any where close to 8 billion of assets.

The private equity market has dried up - specially in the middle east. Distressed Hedge fund investing in one of the reasons newly launched funds are finding it difficult to raise significant assets.

P.S: There are a few other reasons why frontier market Private Equity is stalled; however, I leave that to be discussed in some other blog of mine.

email: patelhiraln@gmail.com