SOURCE: GIC Capital, Inc.

April 10, 2006 07:15 ET

GIC Sees Growth in US Private Equity Market

NEW YORK, NY -- (MARKET WIRE) -- April 10, 2006 --We are seeing the "golden age" of private equity, at least according to Dimitri Elkin, Managing Director of GIC Capital, and a former executive of Kohlberg Kravis Roberts & Co., a New York buyout giant.

Private equity returns are as good as they have ever been. For many years, KKR's best performance was with the 1986 fund that delivered a 35% return, driven by such successes as Safeway and Beatrice. The returns on KKR's subsequent funds dropped below 20%, and few thought that the success of the eighties could ever be repeated. Yet the recent Millennium fund delivered returns of 40%, KKR's best ever. Many other leading funds -- TH Lee, Apollo, Blackstone and others -- have delivered equally strong returns in the past several years.

This strong performance was achieved at a time when private equity firms adopted a friendlier and more collaborative approach towards their corporate targets, a sharp contrast with the bidding wars and hostile takeover tactics of the 1980s.

Among institutional investors, the private equity asset class has never been more popular. Pension funds and family offices are increasing their allocation to private equity, which resulted in private equity firms raising funds of record-breaking size. Last month, the Texas Pacific Group announced the closing of a record $14 billion investment vehicle; Blackstone, Carlyle and several other firms are racing to beat this record. An increasing number of institutional investors no longer consider private equity to be an "alternative asset," but rather a standard component of a well diversified portfolio.

What gives? Private equity has significantly outperformed public equities in the last five years. Corporate scandals, poor governance, Wall Street analysts' bias, excessive focus on quarterly earnings, and the new burden of Sarbanes-Oxley -- all of this has contributed to the real or perceived risk of owning shares in public companies. Privately held corporations have avoided many of these problems, partly due to lower "agency cost," or the difference in incentives between management and shareholders. Some see the recent private equity upturn as vindication for Michael Jensen, an influential Harvard Business School professor who has preached the gospel of agency cost for years, and whose 1989 article "Eclipse of the Public Corporation," is an HBS classic.

The private equity deal environment will continue to be strong in the short to medium term, says Elkin, who expects to see more deals at GIC Capital in the next 18 months. The economy continues to grow, and debt markets continue to provide attractive levels of leverage. But some industry experts give a word of caution, reminding us that the true test always comes in a downturn, and that private equity firms need to continue to maintain high standards of performance to be able to sustain the current level of activity and success.

"It is really important to preserve investors' trust by maintaining investment discipline, and avoiding excessive leverage and the other mistakes of the 1980s," says Elkin.

Contact Information

  • Greenaway Investment Company, LLC
    Ms. Sanne Enermark
    (212) 380-1271