Monarch Warwick private equity

The future for private equity is not bright, according to one academic.

John Colley, professor of practice at Warwick Business School and an experienced business executive, writes in a recently published article that the asset class “is starting to look like a spent force”.

“PE firms have always been adept at laying off much of the downside risk to others while ensuring their investors fully benefit from upside potential,” says Colley, who currently chairs two VCT-backed companies and has held non-executive roles at private equity-backed businesses.

While this approach has succeeded in the past, today’s market is more challenging. “An oversupply of rival funds and investor money looking for opportunities is forcing investment in higher-risk businesses and the acceptance of more marginal returns.”

Colley criticises the prevalence of secondary buyouts, stating that companies that have already introduced leverage or been through cost management processes stand to benefit little from a follow-on sponsor. He also points to the collapse of Greybull Capital-backed Monarch Airlines and the restructuring of Terra Firma‘s care business Four Seasons as worrying signs for the asset class.

Colley believes such events will have a material impact on the broader industry, causing banks to lend less on tighter terms to private equity-backed companies. This “will load more pressure on PE returns before it dampens activity in the industry”.

“It may well be that the [private equity] model has run its course and is ready to be replaced by something else,” Colley concludes.

“A major increase in competition and a shortage of opportunities suggest that the genre has more than reached maturity and decline is now the outlook. If investors want to look for the next big growth market, they could do worse than look to activist investors to shake up sleepy and self-serving boards of which there is no great shortage.”

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