Private equity muscles back with deals, IPOs

DUBAI (Reuters) - Private equity is finally buying and selling companies again after being virtually halted in its tracks by the credit crisis, but skittish investors and a mountain of debt loom as key obstacles to the industry's full recovery.

That was the view from top executives from the world's biggest funds who swept through hot, humid Dubai this week for one of the industry's largest conferences, Super Return Middle East.

Executives gave generally confident speeches to a crowd of 500 delegates -- 30 percent lower than 2008 -- about how the recovery will play out for the industry. Behind the scenes, they met investors from the oil-rich region to gauge appetite for existing and new funds. Some also expressed enthusiasm for investing in the Middle East.

Key to the industry's success is the basic liquidity in the market to buy and sell companies -- which has been extinct since the credit crisis shut off the ability to finance leveraged deals or exit investments already made.

In the past several months, that has changed. Improved equity markets have encouraged private equity firms to launch a small rash of IPOs, sell select investments to corporate buyers and even pick up some deals.

"We've all been through a trying period," said Stephen Schwarzman, who runs private equity giant Blackstone Group (BX.N). "Fortunately, the future looks substantially brighter for us in the private equity business."

Executives highlighted the improving debt market for deals. Schwarzman said it is possible to do deals of $3 billion to $4 billion. David Rubenstein, co-founder of rival giant Carlyle Group CYL.UL, said the largest pure private equity deal that could be done right now would be in the $3 billion to $5 billion range.

"We're coming out of the ice age, it's starting to thaw," said Jonathan Nelson, CEO of Media and entertainment-focused private equity firm Providence Equity Partners.

EXITS OPEN

The crucial market to exit investments and pay distributions to investors has also opened, although not all is clear sailing in the public markets. Fortress Investment Group-backed RailAmerica Inc (RA.N), which owns and operates freight railroads in North America, tumbled 8.3 percent in its debut on Tuesday.

Schwarzman cited five sales from Blackstone's portfolio -- of which four are complete and one imminent -- and said he was evaluating the prospects for up to seven IPOs in addition to one, Team Health, already filed.

"No one knows how long the window will be open for IPOs," he said. "Historically, it's been a pretty streaky kind of market."

DEBT MOUNTAIN

Among the problems private equity firms are grappling with is a debt mountain from the rush of deals during the boom. A number of firms overpaid for deals in the frothy market of 2006-07 and are now having to solve the problems of looming interest payments and sliding sales.

An uncertain economy and volatile markets mean that portfolio companies may see their revenue deteriorate further.

Guy Hands, chairman and chief investment officer of British private equity firm Terra Firma Capital Partners Ltd TERA.UL, owner of music group EMI, predicted sharp change ahead for the industry, with shrinking fund sizes and diminishing pay.

"Many of the senior people need to work for the next 20 years to make same amount of money that they made in 2005-7," said Hands. He predicts the days of private equity firms raising $10 billion or $20 billion funds are likely finished.

Perhaps the biggest issue is raising fresh funds for new deals. Investors over the globe were shell-shocked by the financial crisis and have been risk-averse.

Still, Schwarzman said confidence was improving among investors in the Middle East region, their portfolios have significantly recovered from a deep hit and they were increasingly comfortable with making future commitments.

"Investors in this part of the world are like most investors -- they have been through a very chaotic and difficult period," said Schwarzman.

Carlyle's Rubenstein predicted that the industry would transform itself over the next two to three years; as it faces smaller and less-frequent investments, higher equity levels put into deals, higher priced debt and longer holding periods for deals.

"Private equity will probably come up with a new name. It went from bootstrap deals in the early days to leveraged buyouts to management buyouts to private equity," he said. "Maybe it will go to change capital or value-added equity," he said.

(Reporting by Megan Davies, editing by Matthew Lewis)