An economic downturn and tight credit markets have hampered the environment for private equity investing, but attractive opportunities are likely to emerge, industry players said on Tuesday.

Brooks Zug, senior managing director and founder of investment firm HarbourVest Partners, LLC, said private equity investment activity has slowed substantially in recent months.

“Venture capital and buyout activity has slowed, almost to a non-existent pace,” he said at a Private Equity Symposium in Toronto.

Given the challenging economic environment and the limited availability of credit, few private equity funds are currently looking to raise money. But those that are seeking new funds are finding the environment very unfavourable, according to Eric Berke, managing partner with TorQuest Partners Inc., a private equity fund manager. He has witnessed many instances of funds testing the market environment, then scaling back the amount they ultimately plan to raise as a result of the limited response.

This is partly a result of the market downturn that has deteriorated the assets of investors, leaving them with fewer funds to invest.

While TorQuest is not currently in a position of needing to raise funds, Berke expects that down the road, his company will be forced to seek a much wider base of investors.

“Our fundraising efforts will be much more diverse than they were in the past,” he said. “We expect that we will have to go over the entire globe.”

The struggling economy is also taking its toll on corporate growth, impacting existing investments in private equity funds. This is forcing funds to be more aggressive in divesting non-performing portfolio companies.

“We are very aggressive in divesting or closing down what we call non-portfolio companies,” said John Albright, manager partner with venture capital company JLA Ventures. “Today we would be much more aggressive than we normally are.”

This is putting pressure on companies to react quickly to the changing economic environment, and to focus on effective cash management, Albright said.

Zug expects to see fewer private equity investment opportunities in the next few years, particularly in the buyout realm, as well as lower returns.

“The next few years could be slim years for investing and performance in the buyout industry,” Zug said. “I think we just have to expect lower returns.”

He added that private equity investments could still outperform the stock market, but that returns would likely lower than they have been in recent years.

But the industry experts agreed that despite the widespread challenges facing the industry, opportunities will emerge.

“In spite all the problems, significant private equity investment opportunities are being created as a result of the market environment,” said Peter Jarvis, executive director of the Toronto CFA Society. “On a relative basis, this is a favourable period to begin, or to continue, investing.”

Zug said slow periods of private equity investing often indicate strong opportunities ahead. “It always happens that the best time to invest is when the least amount of investing is being done,” he said.

TorQuest is looking to companies that are being impacted by the market downturn for investment opportunities. In particular, he said the company sees prospects in some of the non-core divisions of major multinational corporations.

“We are actively pursuing those types of opportunities,” he said.

Specific private equity areas that present particularly promising returns include software-as-a-service companies, digital and new media companies, and mobile computing companies, according to Albright.

“We see a huge amount of growth there,” he said.