When the marketplace goes awry, turn to academics. Yet private equity (PE) players seem to have ignored their advice, or at least the wisdom Stewart Hamilton, professor of finance and accounting at Swiss business school IMD, has been offering on the subject. For years, Hamilton has been talking about the “substantial nervousness surrounding the performance of private equity funds,” lecturing for his university’s MBA and open-enrollment programs. He also forewarned of today’s scenario in his 2006 book “Greed and Corporate Failure.” The downturn happened nevertheless.

Asked how his understanding of the subject applies to the Middle East and what are the lessons to be learned, Hamilton offers more than just one hypothesis. He says many of the private equity players are recognizing too late that they significantly overpaid for some of the deals. “The smarter ones got out and sat on the sidelines because they were unwilling to pay some of the crazy prices. Some of them are having the learning forced on them,” he says. On what the future holds for them, he is even more severe. “The funds will disappear and the monies will be returned to the original investors. They will have difficulty re-entering the market in the foreseeable future,” he says.

That may be PE’s worst kept secret out in the open, but not everyone is calling it doom and gloom despite the change that the financial meltdown has brought about. From more money chasing fewer deals a few quarters ago, to fundraising difficulties and underachieving investments, the landscape has certainly changed for PE in the region. With the days of quick-flipping over, there is a need to exercise greater prudence in acquisitions and create value post acquisition, things that were not always on the priority list. While year 2008 saw a significant accumulation of “dry powder,” industry insiders now admit no fantastic deals have happened in recent months.

According to the “Gulf Venture Capital Association (GVCA) Annual Report 2008,” private equity companies have $11 billion ready for investment. But deals are hard to come by, exit routes are scarce and smaller players are finding it difficult to raise funds. In contrast, fund managers last year collected $6.4 billion, 10 percent more than the previous year.

The situation is forcing companies to wait for recovery. Whenever that happens, it’s unclear whether investors will continue to channel their money to the same players or wait for consolidation. According to one estimate, the number of reported deals executed by PE funds in the GCC plunged over 60 percent in re-cent months. The plunge in GCC stock markets has dried up exit opportunities and damaged the attractiveness of IPOs as well. This situation is drastically different from the one not too long ago when liquidity was abundant and there was pressure to do transactions irrespective of valuations. This, according to some, led to questionable deals that took place in areas where PE players had little expertise. “They invested in high valuations and bad assets, and, more importantly, had little or no post-acquisition experience to make such investments work,” says one insider, on condition of anonymity. “In my view the number of private equity players in the region is likely to shrink even if assets under management or aggregate stay as is.” As per GVCA figures, the number of PE investments dropped by 22 percent between 2007 and 2008, while the volume of investments declined 31 percent.

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