Filed under: Private equity industry
For months, everyone has been talking about the decline of private equity. And while it seems likely that future market historians will refer to a private equity bubble in the mid-2000s, experts are saying that private equity isn’t going anywhere, even if it won’t reach the lofty heights it reached a few months back for a while.
Ernst & Young released a report saying that private equity deal flow will remain strong in 2008 — above its 2004 and 2005 levels, right before the industry really took off.
However the credit crunch and increased competition could cause returns to fall well below what buyout shops were hoping to earn on the latest wave of deals. According to Fortune, “One major source of deals is prone to come from opportunistic distressed investing funds that have raised massive sums of capital to purchase beaten-down securities. And the three sectors that should continue to see activity in 2008 include financial services, media and entertainment, and energy.”
As long as there are undervalued stocks, there will be a need and a market for private equity firms. Value investors should be thrilled by the Ernst & Young report — a strong leveraged buyout industry has a way of cutting down on value traps, which are undervalued stocks that just stay cheap.
The credit crunch could have a healthy impact on the industry, slicing back on the ill-advised deals that cropped up earlier this year. Firms can get back to finding undervalued stocks.
News of strength in the private equity industry is probably bullish for value stocks, which are the most frequent targets. Investors who like to try market timing (not something I’d advocate!) may want to move into value stock funds.
Entries (RSS)