ESSAYS ON ISSUES THE FEDERAL RESERVE BANK NOVEMBER 2008
OF CHICAGO NUMBER 256a
Chicago Fed Letter
Navigating the New World of Private Equity—
A conference summary
by William Mark, lead examiner, Supervision and Regulation, and head, Private Equity Merchant Banking Knowledge Center,
and Steven VanBever, lead supervision analyst, Supervision and Regulation
The Federal Reserve System’s Private Equity Merchant Banking Knowledge Center,
formed at the Chicago Fed in 2000 shortly after the passage of the Gramm–Leach–Bliley
Act, sponsors an annual conference on new industry developments. This article summarizes
the 2008 conference held on July 9–10.
To begin our 2008 conference, Carl equity industry. Fundraising for both
Tannenbaum, vice president, Federal buyout and mezzanine funds is still solid.5
Reserve Bank of Chicago, offered some However, the amount being invested in
broad remarks on the ﬁnancial environ- private equity deals is considerably below
ment and how it has affected private the level of last year; this is due to the
equity.1 The recent ﬁnancial turmoil has absence of large deals. The current mar-
dramatically altered the landscape for ket is characterized by lower leverage,
private equity, particularly in the buyout lower deal volume, different investment
sector.2 The diminished outlook for cor- strategies, and greater difﬁculty in ﬁnding
porate proﬁtability has altered projected exit opportunities.
The current ﬁnancial returns and payback periods for invest-
According to Stein, lenders are working
environment presents both ments in both the public and private do-
through the huge backlog of leveraged
challenges and opportunities mains. Leverage is less available and less
loans they were unable to distribute in
attractive as a ﬁnancing source for trans-
for private equity ﬁrms. actions.3 Financial institutions have re-
the latter part of 2007. Solutions to this
backlog are beginning to take shape,
acted to stress on their balance sheets
including sales of these loans to private
by tightening terms, raising prices, and
equity ﬁrms, write-offs, development of
reducing the availability of credit.
new funding vehicles, and the raising
Despite these challenges, Tannenbaum of extensive amounts of new capital by
noted that the faltering economy and the the banking industry.
perception that investors may have over-
Some private equity ﬁrms, Stein said, have
reacted to it have broadened the pool
altered their investment strategies to re-
of opportunities for private equity ﬁrms.
ﬂect the changed realities. Such ﬁrms are
Newer opportunities include investing in
currently emphasizing the middle market,6
ﬁnancial institutions and clean technol-
minority (noncontrolling) investments,
ogy and buying distressed loans and secu-
public companies, emerging markets,
rities.4 In this way, private equity ﬁrms
leveraged loans and other debt instru-
have contributed to restoring markets
ments, and distressed securities.
and economic activity to normality.
Looking ahead, Stein argued that private
New landscape of private equity equity is becoming a mature market, with
Avy Stein, of Willis Stein and Partners, increasing segmentation and competition.
surveyed the current state of the private Reputational concerns surrounding
the image of private equity will persist. The limited partners’ perspectives on recent months have shown an unprece-
Finally, skilled operating management the current landscape of private equity dented volatility. In addition, the volume