To achieve targeted returns, private equity funds must focus on portfolio company value creation, according to a Bain & Company study.

Private equity funds which focus on improving the performance of their portfolio companies can still achieve their targeted returns despite the current global economic slowdown, strategy consultants Bain & Company said today (March 12).

“The key to maintaining returns is portfolio value creation,” said Dr Jochen Duelli, head of Bain’s Middle East private equity practice.

“In the current environment, it is no longer enough in this region to simply rely on rising valuations and dynamic economic growth.”

Even though the GCC has been hit less hard by the global downturn, Bain & Company analysis highlights a number of challenges for private equity players in the region.

Fund raising has become difficult, with even the best funds achieving just 55 per cent of their targets in the past six months.

With many companies preferring to wait for the first signs of recovery before investing, the number of reported deals executed by private equity funds in the GCC plunged over 60 per cent in the past three months.

Moreover, exit opportunities have all but dried up as GCC stock markets plummeted more than 60 per cent over the past 12 months, damaging the attractiveness of initial public offerings (IPOs).

Levers to improve the performance of portfolio companies can range from revenue enhancement initiatives such as targeting new customer segments to complete company turnarounds focusing particularly on overhauling costs improvement and cash management.

“There is no silver bullet when it comes to maximizing value of portfolio companies,” said Dr Duelli.

“Each company must tailor its value creation plan to its strategic position, its financial position and its sensitivity to the downturn. A leading healthcare company in Egypt, for instance, might expand aggressively to gain market share through acquisitions.”

“Fund managers should also prioritize their efforts between portfolio companies,” he added. “For companies that are not critical to the fund’s overall returns, pulling the plug can sometimes be the right decision.”

Bain & Company, which is widely recognized as the leading strategic consultancy to private equity funds globally, remains optimistic, however, about the long term prospects for private equity in the region.

“There is still a large amount of committed, un-invested capital in the region and institutional investors remain firmly committed to private equity in the region.” Duelli said. – TradeArabia News Service