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11 December 2008

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Although the debt markets remain challenging and price expectations continue to decline, the long-term outlook for European private equity is expected to generate attractive returns, as investors rapidly renegotiate deal terms and signal a return to more conservative investments. This is according to 3i Infotech – Framework (Framework), the UK’s leading provider of private equity management software, following its recent summit in Zurich. The findings mark a significant shift in investor sentiment, as the market seeks to cope with the current challenging economic conditions.

“After three years of exceptional growth, no one is in any doubt about the poor health of the financial markets and the impact that this has had on the private equity community,” said Peter Wooster, Alliances Director, Framework. “Fund raising is at its lowest level for more than three years and the number of asset disposals has fallen off the cliff which has had consequences for both valuations and performance. However, while conditions in the short term remain volatile, long-term opportunities persist as investors focus on signing a series of smaller deals that require increased levels of equity and involve a more complex, hands on approach.”

With deal volume and complexity set to increase, it’s almost inevitable that the transaction landscape for 2009 will dramatically shift. Since 2001, average equity share in transactions has typically fluctuated at around 33%* although in recent months, with less available debt, average equity share has increased to more than 40%. This, combined with an expected increase in the length of equity holding periods, has led industry insiders to pursue more long-term outcomes, with many European investors not expecting market prices to recover until 2011 or later.

Wooster added, “As the impact of recent events within the investment banking community continues to play out across the wider financial services marketplace, it’s clear that the private equity community faces a number of significant challenges throughout the course of the next 12 to 18 months. Investors are under growing pressure to develop and protect margins, streamline operational efficiencies and increase existing levels of equity within businesses that can demonstrate strong performance and growth. It is therefore now, more than ever, imperative for private equity participants to be able to accurately map and assess all aspects of their existing portfolio.”

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