MUNICH (Reuters) - Yet more bad news is likely to come from the credit meltdown before things get better, private equity executives forecast on Tuesday.
By Megan Davies
MUNICH (Reuters) - Yet more bad news is likely to come from the credit meltdown before things get better, private equity executives forecast on Tuesday.
"I think we are seeing a meltdown in the credit markets that has some life in terms of the downside left to it," said Scott Sperling, co-president of Boston-based private equity firm Thomas H. Lee Partners, referring to credit market turmoil triggered last summer by problems in U.S. subprime mortgages.
Sperling, speaking on a panel at the "Super Return" conference in Munich, predicted it could take months for banks to clear billions of dollars of debt left by the credit crisis which also put a halt to large leverage buyout deals.
!ADVERTISEMENT!"The forces that have limited the liquidity that's available will continue to work in a negative way in certainly the next three to six months and maybe somewhat longer, and that needs to be washed out of the system," Sperling said.
Thomas H. Lee is -- alongside Bain Capital Partners -- behind the $20 billion buyout of U.S. radio operator Clear Channel Communications <CCU.N>, a deal still to close.
Steven Puccinelli, head of European Private Equity at Investcorp, speaking on the same panel, said deals over the next 12 to 18 months would be hard to come by, but buyout firms were keeping busy tending to their portfolio companies.
"We need to be careful that we don't undertake challenges we can't meet in an effort to put money to work," said Sperling, who said he was not interested in doing deals like PIPE transactions, where only a minority stake is taken.
"The thing I'm concerned about with PIPEs is that you may not have control of the situation," Sperling said.
The poorer conditions have caused a number of deals to be renegotiated or even pulled.
Sperling said that "anyone selling their company... will look at the situation that we've confronted in the last year and say 'I may need to change the terms of the deal."'
The turmoil is hitting private equity investors' expectations.
CalPERS' senior investment officer Leon Shahanian said the pension fund had adjusted their expectations of returns. He said he thought private equity returns would come down, but stressed that had to be put in context of the last few years' returns.
He said CalPERS has $42 billion exposure to private equity, and said the existing portfolio was in "pretty good shape."
Shahanian said CalPERS started positioning its portfolio a "bit more defensively" about 12 months ago, such as focusing on the smaller end of the buyout market and Asian markets.
"We are not giving up on the buyout firms," he added. "We are still allocating capital," But he said he was being very selective right now and not backing every one.
(Editing by Louise Ireland)
