As a guest speaker at the prestigious SuperReturn Middle East 2008 Conference in Dubai this past Tuesday, I had a great opportunity to hear the latest thinking on the future of private equity (PE) in a post-Meltdown Monday world from the best in the business.

The annual conference brings together approximately 500 private equity professionals from firms and investors with a presence or interest in MENA. (The term MENA is an acronym for “Middle East and North Africa” and refers to the region that extends from Morocco in northwest Africa to Iran in southwest Asia, including all the Arab Middle East and North African countries except Turkey.) On the speaking roster were Henry Kravis, David Rubenstein and Steve Schwarzman, founders of KKR, Carlyle and Blackstone, respectively, as well as the principals from dozens of other leading global and regional firms.

Although the views of these professionals varied in the degree and intensity in which they were held, there was a general consensus around a number of points. The conference was off the record for the press, so in keeping with that spirit, I will not attribute any direct quotes to specific speakers.

Long Recovery: No one thought that the recovery from the current financial crisis would be quick. In fact, approximately 90 percent of the attendees thought that it would take three years or more for financial markets to recover to their 2007 highs. Of these, 38 percent thought it would take more than five years. Most felt that the United States and Europe, in particular, were in for long and nasty recessions.

Traditional PE Business Models Won’t Work: The days of using financial engineering (high leverage, “covenant light” debt and arbitraging higher exit multiples) to generate returns are gone. With the consolidation of the banking industry globally, there are fewer lenders today than there were yesterday, and the ones that are still standing have opportunities to buy existing debt in good companies at substantial discounts to their face values. While cost cutting can improve profitability, companies cannot cost-cut their way to prosperity. Therefore, the premium is on growth as the way to generate acceptable private equity returns in the future.

Minority Interests and Buffet: Traditionally, PE firms have taken control positions in companies and have generally shunned minority investments. In this turbulent financial world with debt financing scarce, the head of a major global PE firm expressed the view that minority interests and “buy and hold” strategies might become more prevalent, specifically citing Warren Buffet’s recent strategic investments in General Electric and Goldman Sachs as examples of what the future might hold. Following on this point, the moderator remarked that when Warren Buffet was asked to explain his strategy for determining when and under what circumstances to sell a company, he responded by saying: “I don’t know. I’ve never sold one.”

Emerging Markets versus Developed Markets: As readers of MTD know, the term “emerging markets” was coined by my friend, Antoine Van Agtmael in the early 1980s. It now refers to about 200 countries—essentially all of the countries in the world outside the United States, Canada, Western Europe, Japan and Australia. A head of one of the major global firms thought that the term “emerging markets” had outlived its usefulness because it was now so broad. For example, lumping the countries of China and Chad into one category is not terribly meaningful. In the words of this individual, the term “developed markets” should be changed to “submerging markets.” More than anything, that remark characterized the views of the conference.

Places to Avoid Investing: Europe and commercial real estate, anywhere.

Highest Future Returns: Approximately 60 percent of the participants thought that the best returns over the next five years would come from the Asia and India region. While the current credit crisis would lead to recessions in many countries, most felt that it would merely slow the growth rates in China and India. In this context, the current crisis might actually be a blessing in disguise for China by providing an opportunity to cool down the overheating of the economy experienced in 2007.

Even before the current financial crisis, the center of gravity in the global economy was shifting from the one billion people who live in the developed markets of the world, to the 5.8 billion people who live everywhere else. Over the past three or four years, money has flowed to the large, rapidly-developing economies of the world like China and India, as well as the resource-rich countries such as Russia, Brazil, Indonesia and Australia. By exacerbating recessionary cycles in the United States and Europe, the current credit crisis will only serve to hasten this shift.

In addition to myself, there were several other representatives from China. I was most impressed with Hao Wu, a partner in Centenium-Pinetree China Private Equity. Centenium targets fast-growing, middle-market companies in China with equity values ranging between $20 million and $200 million. Centenium likes domestic, consumer-oriented companies; knowledge intensive companies and companies in the alternative energy sector, including clean energy, energy-efficient technology and environmental technology. Centenium’s investment strategy is to identify excellent companies and help them to grow, not only through capital injection, but also by connecting them with the contacts and resources necessary to build them into leading global companies.

Although interest on the part of global PE firms in China has been strong, they prefer large control deals and have gotten used to the outsized returns they have been able to earn historically on highly-leveraged buyouts in the United States and Europe. As a result, the deals in China which tend to be significantly smaller, are generally unleveraged and where obtaining majority ownership is problematic have been of less interest. With the cataclysmic financial events of the past two weeks, it appears that unleveraged, “growth capital” deals, such as those espoused by Hao Wu and his firm, will be the trend of the future.