The slowdown in the private equity industry started in mid-2007, predating the banking meltdown and the stock market volatility which has seen the market for initial public offerings practically disappear this year.
So it came as little surprise when KKR Private Equity Investors (KPE), a Guernsey-based and Amsterdam-listed unit of the buyout giant Kohlberg Kravis Roberts, announced yesterday a dramatic fall in the value of its assets and postponed a merger with its parent and a joint share listing.
The value of investments held by KPE fell by more than $1.1bn to $3.8bn in the first nine months of this year.
"As the decline in KPE's quarterly net asset value evidences, some of our investments faced reduced valuations during the third quarter as a result of the extraordinary turbulence in the global capital markets," said George Roberts, co-founder of KKR.
"We are redoubling our already extensive efforts to improve the operations of our companies in anticipation of a weaker economic environment."
IPO markets across the world have frozen this year as caution among potential investors curbs demand for new shares. Company managements, too, are unsettled by the volatile movements in global stocks that make pricing IPOs difficult. Buyout firms at the height of the boom market that peaked in 2007 had listed vehicles like KPE to open up their portfolios to retail investors and boost liquidity. Investors had previously been locked in for years.
The collapse in asset values at KPE may reinforce fears about the outlook for investments held by private equity, which in recent years used increasing amounts of debt to make acquisitions. The high values paid for businesses by buyout firms drunk on easy borrowings could leave creditors, such as investment banks, exposed. Banks across the City competed with each other until mid-2007 to lend to buyout firms, with very aggressive terms and often loose covenants.
As recently as July, KPE and KKR had announced plans to merge their businesses, delist from Amsterdam's exchange and relist on the New York Stock Exchange by the end of the year. KPE went public in May 2006 in a $5bn, or $25-per-share, offering. Its shares are now about a fifth of the IPO price.
The performance of other listed buyout funds and their vehicles does not inspire confidence. Shares in the Blackstone Group, which listed in New York in the summer last year, have fallen by about two-thirds.
Carlyle Capital Corp, which was an affiliate of US-based buyout firm Carlyle, also listed in Amsterdam but went bankrupt in March and liquidated its assets. Carlyle Capital Corp had however mainly invested in mortgage-backed assets, which were at the centre of the credit crunch.Reuse content