Spotlight on private equity record as it hits the stage

Sun Feb 26, 2012 7:05pm EST
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By Simon Meads and Greg Roumeliotis

BERLIN (Reuters) - Starved of credit, and facing a lack of deals and a new bout of indignation over executive pay, the private equity sector has one solace: returns continue to be better than those in stock markets.

Buy-out houses, which make a living buying and selling companies for profit, have agreed some $15.2 billion of deals so far in 2012, down 28 percent on last year.

They have found it hard to raise debt to fund deals, the fuel that drives the industry, and it is equally challenging to sell companies on the stock market, or to other large corporate rivals, who are sitting tight on their cash reserves.

But when the industry gets together in a plush hotel in historic heart of German capital Berlin, it can at least point to returns of 11.5 percent in 2011, compared with a drop in global median total equity returns of 3.7 percent, according to data from Wilshire Trust Universe Comparison Service.

It may be significantly lower than the 20 percent plus annualised returns that private equity firms usually target but it has been enough to satisfy many investors who typically look for them to outperform equities by 300 to 500 basis points.

"The returns that this asset class has generated for our pension fund are superior to other asset classes," said Jane Rowe, senior vice president at Ontario Teachers Pension Plan last month.

It marked a rare intervention by one of the world's largest private equity investors as the industry faced political and public vilification over claims of job cutting and asset stripping.

The real measure of success for private equity and its investors is the cash that flows into their accounts when companies are sold. That drives returns and fills executive bonus pots.   Continued...