GLOBAL - Despite the rebound in the private equity markets, investors are "cautiously optimistic" about their investments and are returning to more realistic valuations and performance expectations, says Mercer.
According to the consultants, after posting negative returns for three years in a row, the private equity market recovered during 2003.
“But unlike investors during the go-go years of the late 1990s, current investors appear cautiously optimistic,” said Mercer.
The last few years have seen a sharp decline in both the number of partnerships raising capital and the amount of capital raised.
In 2003, less than one in four of the partners that had been active during the 2000 peak were still in the game. Fewer funds and smaller fund sizes have become the norm. Yet, fundraising has begun to recover, with growing investor optimism and more exit opportunities, said Mercer. Caroline Aboutar, a private equity specialist at Mercer said: “While the asset class begins to recover, the use of different valuation methodologies to determine an investment’s value raises obvious consistency concerns.” Mercer said that mezzanine capital — defined as short-term, high-risk, and high-yield capital, usually taking the form of subordinated debt, convertible debt, or debt with warrants — has generated increased interest among investors of late.
Mezzanine capital is appealing because of its unique risk/return characteristics: it carries slightly higher risk than high-yield fixed income but has the potential for equity-like returns, the consultants added.
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