Private Equity Is Alive and Kicking; No One Will Deny That the Private Equity Market Has Been Hit Badly by the Credit Crunch and Economic Downturn, but There Is Every Reason to Believe That Mid-Market Providers Will Recover and Prosper, According to Paul Harper at the Birmingham Office of Barclays Private Equity

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Byline: Paul Harper

Mark Twain is famously credited with saying "The rumours of my death have been greatly exaggerated", in response to the publicationof a premature obituary notice recording his demise.

Many of us in the private equity industry will know how he felt. But whilst 2009 has certainlybeenadifficult year the sector is far fromdead.

Itwasnever going tobe easy - an independent consultants reportpublished inDecember 2008 claimed private equity was entering a "perfect storm" and produced headline grabbing forecasts that up to 40 per cent of buyout firms would go bust, 50 per cent of all portfolio companies would default on debt obligations -and asset valuations would collapse.

To compound the uncertainty, there were fears that given the slowdown of portfolio companyexits, theabilityof investorsproviding funds to the private equity industry (known as Limited Partners, or "LPs") tomeet requests for capital to support new deals would be under pressure.

Therehavealsobeenpoliticaldevelopments: an impending European Directive threatens thevery futureof theindustryandtheimpact and cost of theUK'sCarbonReductionCommitment is still being assessed.

So even before considering the impact of changes inthedebtmarkets, therewere a few issues keeping private equity executives awake at night!

However,despitetherebeingasmallnumber of highly publicised manifestations of these concerns, the forecast widespread "shakeout" has yet tomaterialise.

Sowhat does all thismean for the future of the Midlands and its dominant mid-market sector? Put simply, private equity is adapting and going "back-to-basics". In truth, a number of the issues were always likely to be more pronounced in the large /mega deal arena. The mid-market has been less reliant on aggressive debt leverage and large numbers of overseas banks, and is more resilientwhen such factors disappear.

Mid-marketprivateequity reliesonworking closely with quality management teams to deliversustainablebusinessgrowth.Thishas been demonstrated throughout 2009 -many private equity firms reacted swiftly to the economic downturn andworked closelywith management teams of portfolio companies to ensure strategies were appropriate and scenario planning was detailed.

We have also witnessed a "flight to quality" which may well lay the foundations for the coming years. First, private equity houses and banks have become more selective when considering new opportunities. Secondly, banks aremore selective about which private equity sponsors theyare prepared to support and thirdly, investors in private equity are focussing capital on top performing private equity firms,withanestablished track record of success At its most basic level, these trends have propelled the importance of relationships into the spotlight. TheMidlands benefits froman excellent professional and financial infrastructure.

Good relationships exist between the region's private equity houses and banks -whose offices are frequently just around the corner.

The market has been rightly cautious throughout 2009 - the scale of uncertainty facedaswe beganthe yearwasunprecedented. …