Hans van Swaay is a Partner with Lyrique, the Switzerland-based private equity investor. As a panellist at Capital Creation's 2010 meeting, we spoke with Hans to hear his thoughts on the current private equity market and, significantly, how he perceives the impact of the financial crisis on General Partners.
“The private equity market is currently a shrinking market, and will continue as such for the next few years”, asserts Hans in a somewhat bleak outlook. “I believe we are heading back to the pre-bubble levels and as we continue to shrink, returns will be under pressure and the number of people employed in the private equity industry will get smaller”. For Hans, this is the global perspective of private equity - and he is quick to emphasise, however, that within the different regions there are different stories at play. “Clearly the likes of China, India and the Far East in general are growing and will continue to grow, as will Latin America. But this is in contrast to the trends in Western Europe and North America”.
Another factor that Hans believes currently defines the private equity arena is the perception of the market globally. “Everyone thinks private equity is the ‘bad guy’. Our industry has received some pretty unwelcoming PR and we have become the whipping boy of politicians and regulators alike”. It is difficult to overlook the fact that there has recently been a new wave of legislation and policies, seeking to restrict the scope of private equity as Hans suggests. Both the US and the EU have initiated rather different proposals, which Hans thinks will be ultimately coordinated. This, in turn will result in a smaller pot of money and fewer investors in private equity. “Some players may fall away”. Hans continues, “Already we are witnessing the first banks pulling out of private equity and insurance companies may follow. Both groups have traditionally been major investors”.
So what does this current environment mean for General Partners? “Performance has suffered a lot”, argues Hans. “Too much capital was raised in the boom times of a few years ago and there is still too much capital chasing too few deals”. Also, Hans suggests that the economic crisis will have a deep impact on how GPs conduct their business. “They will need to reduce in size; not only in terms of fund sizes, but also in relation to team numbers as well. Additionally, in the short-term at least, GPs will need to act on fee structuring. In the current climate, LPs are unwilling to pay excessive management fees and especially dislike accessory fees like transaction fees or monitoring fees. GPs will therefore need to adapt to this”. Flexibility is a key aspect of how Hans sees the new paradigm for GPs. “The ability to adapt and meet the requirements of their investors, especially the larger players, will be vital. No longer can GPs simply say ‘Here’s what we are doing – take it or leave it’ since this will not work in the current environment. They increasingly need to be able to tailor their mandates to their (bigger) investors”.
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