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Private equity conference under cloud

BERLIN (Reuters) - Gloom and disruption were the overriding themes at the private equity industry’s main conference in Berlin this week.

Snowed-up England came to a standstill the day preceding the conference, meaning a number of attendees trying to fly out of London airports arrived late or bailed out altogether.

Even before that impact, the numbers were lower, with delegate numbers down 200 from last year’s conference, with the event drawing 1,200, an organizer said.

Attendees, gathering around the buffet lunch or buying drinks at the bar, noted that it was quiet.

“How are you finding the conference? Doomsday?” one delegate asked another when meeting at the bar.

"I think the mood here is subdued, as it should be," said Simon Walker, CEO of the British Private Equity and Venture Capital Association BVCA.L, an industry body, sipping a glass of wine at the end of a long day.

Some commented that the title of the “SuperReturn” conference, which took its name from the industry’s earlier heady days, was getting to be a joke.

Investors were in a militant mood. One collared a prominent private equity executive after he came off the stage and quizzed him about one of the fund’s underperforming investments.

Others just looked tired. “Everyone looks depressed,” said another investor, who said a number of his meetings on Tuesday had been cancelled because people were stuck in London.

The conference is a major one for the private equity industry, drawing speakers from the U.S. and Europe. Henry Kravis, co-founder of Kohlberg Kravis Roberts & Co, and David Rubenstein, co-founder of Carlyle Group, were among the big hitters, but both their addresses stressed that the industry had to adapt to survive.

“All of us have to adapt,” said Kravis. “We have to change the way we’ll do business. If we don’t, we’ll be left out.”

Rubenstein noted that the “theory of evolution applies to private equity as well as animals and we need to evolve.”

Apollo Management LP founder Leon Black, who expects to be investing in debt for the next two years, said: “The big public-to-privates are gone the way of the dodo.”

GLOOMY PREDICTIONS

British private equity firm Alchemy Partners’ Jon Moulton presided over a particularly gloomy poll on the last day.

Asked which private equity investments would perform best, 42 percent of the audience said “distressed” while only 3 percent voted for large buyouts.

“That demonstrates what’s happened,” said Moulton. “Leverage is out of fashion.”

Over 80 percent thought there would be a “bloodbath” in LBO defaults in the next year in Europe, 52 percent thought less money would get committed to private equity and 17 percent thought there would be a “substantial extinction” of large buyout firms, with a further 46 percent thinking that 16-25 percent of firms would go to the wall.

But they still thought pay should be high. Asked if $500,000 (342,167 pounds) was a fair salary per year, 58 percent said “yes”.

U.S. President Barack Obama on Wednesday set a $500,000 annual cap on pay for top executives at companies receiving taxpayer funds.

“Lower pay may be something we have to face,” Moulton said.

Rubenstein, who often begins his speeches with a poll to warm up the audience, also threw a series of questions out before his speech.

“How many feel wealthier than last time?” he asked, and watched a few hands go up. “Less wealthy?”, however, drew a show of hands.

And in the midst of the gloom, there was even a call for caution from LPs to limit their investments into private equity funds, from Terra Firma CEO Guy Hands.

He repeated advice he had given to a wealthy potential investor who had wanted to put 200 million pounds into his fund.

“If you want to invest in private equity, please don’t put more than 10 percent of your total net worth into it, and please don’t give any one manager any more than 10 percent of that 10 percent,” Hands said.

Speaking as a former pension fund trustee himself, though now CEO of the BVCA, Simon Walker echoed the call.

“I would never have suggested that we should have invested more than 5 percent actually. To me that looked sensible.”

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