Private Equity Emerges From the Economic Crisis, According to Towers Watson

NEW YORK and LONDON, September 1, 2010 — Market conditions are now providing opportunities for private equity managers and their investors in selective areas of the market according to new research produced by global professional services company Towers Watson (NYSE, NASDAQ: TW). The research asserts that portfolio company operating performance is stabilizing, pricing for new deals is becoming more compelling from a buyer’s perspective and financing packages are increasingly available for the right businesses.

“A flurry of deal activity announced in early 2010 is testament to the potential for transactions to be created for the right businesses if managers have the skill and capacity to aggressively seek new deals,” said Mark Calnan, global head of private equity research at Towers Watson. “While target companies exist across the size and geographical spectrum, we are seeing increasing opportunities in the small to mid-market buyout space and in emerging markets. There are also niche opportunities that we find attractive from a thematic perspective, such as distressed and turnaround managers, which appear to have an increasing supply of opportunities given the economic situation.”

The research, entitled “Private equity – emerging from the crisis,” references the widely stated relationship between historic periods of economic contraction and strong vintage year performance in private equity. However, it urges caution about the sustainability of this relationship, citing the significant capital overhang as a potential obstacle to the pattern repeating itself. In the publication, Towers Watson emphasizes that a period of anemic GDP growth in developed markets will give those managers who are able to genuinely add value to their portfolio companies the opportunity to generate significant outperformance above equity market returns. It also draws attention to those managers that can drive significant operating margin improvements, and those that can build market leaders in niche pockets of growth as being particularly well positioned in this environment.

“So while private equity is facing some significant headwinds that require the industry to take stock and evolve, we continue to be positive about some niches within private equity – turnaround managers, small- and mid-market buyouts and emerging markets – all of which can benefit from a depressed pricing environment and are less reliant on leverage to complete transactions,” said Calnan. “The skill that enables these managers to improve the earnings of portfolio companies should differentiate them from their peers and provide further support for considering a commitment to private equity. That said, as ever, we encourage selectivity in making new commitments.”

The publication includes chapters entitled:

• Is there a future for funds of funds?
• Secondary funds – is this another bubble?
• Profiting from distress
• Energy – can money be made post tax?

In addition, the publication explores six markets:

• United Kingdom – saturated or scope for outperformance?
• France – is there sufficient differentiation?
• Germany – can the locusts deliver?
• Nordics – the value of local knowledge
• Australia – beyond the Super funds
• Asia – capturing the emerging wealth theme

Towers Watson Investment

Towers Watson Investment is focused on creating financial value for the world’s leading institutional investors through its expertise in risk assessment, strategic asset allocation and investment manager selection. It is a division of Towers Watson’s Risk and Financial Services business and has over 650 associates worldwide.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.