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Where is private equity looking next?
By: Milken Institute
May 01, 2012
   
   
When U.S. banks had to pass stress tests several years ago, it was to assure regulators the institutions could withstand future shocks. By contrast, the heads of private equity firms zero in on companies so stressed they are the verge of surrender.

Today most of the low-hanging fruit has already been plucked in the U.S., though things appear to be ripening in Europe.

"Three years ago, it was time to back up the truck. There were huge opportunities," with U.S. assets going for deep, deep discounts, said Apollo's Leon Black. Now he says the real opportunities are in Europe.

But a dissenting vote came from TPG Capital's David Bonderman. "Europe is going nowhere, forever," he said firmly. Then he caught a glimpse of CNBC anchor Maria Bartiromo's arched eyebrows. "But the Italians look better," he joked as the audience chuckled.

Banks are resisting clearing their books, but Black says eventually the will have to sell off assets, and he predicts the best opportunities won't be in companies or corporations, but in real estate.

Providence Equity Partners' Jonathan Nelson says his firm is finding that India has rolled out the welcome mat. The country's big banks are partnering with investors looking for companies worth redemption. India has developed a system that allows foreign investors to bypass the country's many byzantine laws to connect directly with Indian companies.

Panelists discussed creating platforms in their own companies that allow them to either invest more broadly or narrowly in equities or sectors of the economy where they see promise. "We think of ourselves as asset managers rather than just an equity firm," Bonderman said.

Nelson is looking to media and the Internet for returns (Black, on the other hand, said he won't touch technology). "There is probably no more powerful trend than to have the Internet untethered," Nelson said. "Mobility changes everything."

Nelson says he's quite pleased to let Android and Apple slug it out over building a cheaper, better smartphone and tablet. That leaves the consumer with more money to spend on content - and that's where he's parked his investments, most notably in Hulu. He recalled that several years ago, he had to explain to Global Conference attendees exactly what the spunky start-up Hulu was. Now the company is poised to bring in a billion dollars next year; it has 200 million paid subscribers who want the shows and movies it provides.

Education is also a potential boom area, according to Nelson. The way students learn is about to dramatically change, and for that reason, his company is looking keenly at ways to invest in education.

"In South Korea, by 2015 there will be no textbooks. It will all be on tablets," he said. "If you take content and give it to more people in a mode they prefer, you will get more readers." He predicts that those who cling to the old model will lose, and South Korea will lead the world in this new direction.

Jonathan Sokoloff of Leonard Green & Partners said that his firm sees value in retail. He likes Whole Foods because people are becoming more demanding about food quality, and people have fun shopping in the Container Store, even though there's nothing in there that they really need.

The key is not just to look at the company itself, but who on the sidelines might eat its lunch. He noted that Amazon has decimated the bottom line of some very good companies. "There will be winners and losers in this Darwinian purge," Sokoloff said.


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