Executives give private equity the thumbs up

Australian business executives believe private equity benefits the local economy and will play a key role in 2008, according to a new report by the Economist Group’s business-to-business arm, the Economist Intelligence Group.

The report, entitled Private Equity moves in: The impact on business in Australia and based on a survey of nearly 300 Australian executives in December last year, found that most (three-quarters) think the private equity model is either positive or somewhat positive for Australian business.

Seventy-nine per cent of respondents agreed that private equity had compelled businesses to become more efficient, while 68 per cent agreed private equity has provided businesses with more strategic options.

An overwhelming majority of respondents indicated that one of private equity’s key attractions was the opportunities it provided for personal gain.

Seventy per cent said they thought the influx of private equity in Australia in recent years had placed a greater emphasis on performance-oriented remuneration and that that was a good thing.

Sixty-six per cent said they felt a key benefit of private equity was that it resulted in more streamlined decision-making, while 65 per cent said they believed it usually made business objectives clearer.

A further 62 per cent cited another benefit as the speed with which changes could be made as there were no public shareholders or analysts to question decisions.

Although respondents were overwhelmingly positive about private equity, they expressed a number of concerns.

Many (85 per cent) said they were worried about leverage ratios and the impact these may have on cost-cutting and redundancies.

That said, 36 per cent said they think the benefits of a private equity buyout to their company would outweigh the risks, while 30 per cent felt the risks would outweigh the benefits (34 per cent were unsure).

According to the report, it is generally believed that the global credit crunch will lead to a reduction in the number and value of private equity deals this year.

However, the report said that falling asset prices and tighter liquidity also creates opportunities, with more businesses likely to turn to private equity for funding.

Private equity buyouts accounted for just 4 per cent of all merger and acquisition deals in Australia in 2007, compared with 31 per cent in the US, 30 per cent in France and 21 per cent in the UK.

According to the authors of the report, the Australian private equity industry has ample room for growth.