Transparency and Efficiency Key to Private Equity Success

After pushing through the effects of the credit crisis of the past couple of years, private equity firms are beginning to see the economic environment ease up and are anticipating improved activity in the year ahead.

Potential deal companies that held out in 2010 are creeping back into the market, implying that deal volume will increase. Private equity deal volume began rebounding in 2010 reaching $197.5 billion globally, up 53% from 2009’s deal volume, according to Dealogic. The competitive bidding for new deals increased in 2010 but, while still high, is expected to ease somewhat in the first half of 2011.

Sales or dispositions are not expected to rise dramatically in the short term because private equity firms are still forced to hold onto deals longer. However, this is expected to change as debt financing is easing which creates demand for transactions and opens up exit opportunities.

Competition for Deal Activity on the Rise

Currently, dry powder at private equity firms with closed funds is very large which creates a need for increased deal flow to put the funds to use and maintains a competitive environment for deal activity. In addition, according to Pitchbook, only $148 billion capital was raised in 2009 (54% less than 2008) and in 2010 only $90 billion was raised. This creates a competitive fund-raising market as pent up demand for funds is satisfied.

With such competition on deal activity and on fund raising, private equity firms need to become more efficient at managing their marketing efforts. The firms that employ technology, such as private equity CRM software, will be able to measure the effectiveness of marketing activity by managing key metrics and ensuring that fund raising and deal opportunities are followed through to completion. PrivityCRM is a software product that many private equity firms are embracing for this task.

Limited Partners More Selective of Private Equity Firms

Limited partners are very well aware of the demand for their capital and are becoming more demanding with their expectations of the private equity firms they choose to deal with. With this increase in selectivity, a decrease in the number of private equity firms is expected and existing firms are not expected to increase staffing levels. This is good because it keeps administrative costs lower but it means firms need to become more operationally efficient.

There has been a steady rise over the last two years in limited partners’ interest in due diligence regarding the private equity firm’s management and operations. Limited partners are demanding that private equity firms reduce costs by improving operational efficiencies in order to reduce the fees charged to the limited partners.

There is a push to reduce fund expenses as well as management and other fees. And limited partners want more transparency through improved and more timely reporting in order to monitor expenses and fund growth.

How Private Equity Firms Can Get Ahead

Implementing better document management solutions and financial reporting software will give the private equity firm a competitive edge. Implementing these systems at portfolio companies will also more quickly increase value creation of the assets in the fund by making them more profitable. These are key deciding factors for limited partners when selecting a private equity firm to manage their capital.

The private equity firms that can demonstrate infrastructure strength and transparency will win the limited partner’s capital.

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