Just a year ago, the private equity business was frozen, and fear was rampant that the global economic system would fall into the abyss. Of course, the world avoided that worst-case scenario. And while growth hasn't exactly roared back since then, the world economy is perking up -- and so is dealmaking. Following are just some of the main merger-and-acquisition themes coming out of the World Economic Forum at Davos.
  • Donald Gogel, the CEO of private equity firm Clayton, Dubilier & Rice: As a sign of strength, he recently raised a private equity fund of $5 billion and is upbeat on the prospects for buyouts. He likes business services and health care.
  • Peter Weinberg and Joseph Perella, partners at the investment bank, Perella Weinberg: They're seeing the M&A pipeline build up significantly, even though there are still concerns about particular sectors of the economy, especially in consumer and construction.
  • Stephen Schwarzman (pictured), CEO of private equity firm Blackstone Group (BX): He says the time for "pessimism has ended," and it's an "interesting" time to buy assets. Actually, he's taking a geographical approach and thinks the best deals will be in the U.S., Canada and yes, Asia. Schwarzman also says the strongest returns for private equity usually come a couple years after a recession.

Emerging Markets Are on Fire

As with any high-powered group, there was diversity of opinions. Yet, the dealmakers at Davos seemed universally enthused about the prospects in emerging markets. And it's not just about China, even though its growth continues to be staggering: Schwarzman thinks it will remain in the 8% to 10% range because of government policies.

India, Brazil, Korea and Turkey also look attractive. These economies have weathered the global recession quite well and are poised to resume growth. In fact, the dealmaking has already been active in the emerging markets. CEO Volkert Doeksen of Alpinvest (a major European private equity firm) says roughly a quarter of all buyouts in 2009 were in Asia.

Consider the recent report from the International Monetary Fund, which indicates that the world economy is coming back stronger than forecasted. That is, the growth rate is likely to be higher than 3%. And as for Asia? Excluding Japan, the IMF expects growth of 7%.

Challenges and Risks

Still, it's not easy to pursue private equity deals in emerging markets. First of all, the government regulations can be stringent. For example, when Carlyle Group set out to raise a fund in China -- denominated in the local currency -- it established a partnership with the city government of Beijing. Such private-public partnerships are time-consuming and expensive, but are crucial for getting traction in emerging markets. They also require having a strong reputation and track record in dealmaking.

Next, performing due diligence is difficult. Often, companies in emerging markets are family-operated. What's more, the legal systems can be spotty.

Finally, emerging markets are always susceptible to economic volatility. True, this wasn't the case during the prior recession, but history has shown various times when emerging markets can easily crater. What's more, the results can be even worse, as governments take actions to bear down on foreign investors.

So, while it's encouraging to see private equity make a comeback and have a clear plan, as we've seen from time to time, the optimism can get carried away.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.

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