AS NEW FUNDRAISING HIGHS ARE SET, RELATIVELY FEW GPS ARE GETTING CAPITAL, a trend that will continue according to a range of industry specialists. The Wall Street Journal explains this irony in an article that picks up on statistics from private equity fund advisor Triago. Although annual fundraising for general partners rose 35 percent in 2013 to a post-2008 financial crisis record of $365 billion, the number of final fund closures increased only 12 percent over the same period, suggesting that “many funds are falling short of their goals or failing to raise money altogether,” writes the Journal. “How could there be famine amid such plenty? Investors are committing larger sums of money to a smaller number of bigger, better known firms and concentrating due diligence efforts on an increasingly select number of funds,” in part because limited partner resources are stretched thinly in a private equity space that has rapidly grown in complexity. Triago forecasts that fundraising will rise 10 percent in 2014, aided by record net cash “pouring into limited partner coffers” from realized PE investments in 2013.
AFTER 2013’S SUBDUED PACE, PE ACQUISITIONS ARE SEEN PICKING UP IN 2014, aided by a continuation of the U.S. Federal Reserve’s dial-back in quantitative easing, initiated last month. Tighter U.S. monetary policy should mean more expensive debt in most markets, decreasing both leverage and asset prices, and increasing private equity investment appeal. Bloomberg reporter Devin Banerjee discusses the growing consensus around this view in a 5-minute Bloomberg video that looks at 2013’s deal-making highs and lows and what industry expectations are for 2014. In particular, Banerjee notes that Asia is likely to see a significant increase in PE acquisitions this year, as general partners find it easier to bargain hunt in a sustained environment of relatively slow growth. Sources are also telling Banerjee that distressed investing in Europe will continue to accelerate in 2014, after a rise in the latter half of 2013. Banks, encouraged by the stabilizing European financial and political environment have increased their sales of troubled assets to private equity firms in recent months. The current state of play in Europe is summarized by a Financial Times story.
DEMAND FOR PRIVATE EQUITY-BACKED IPOS REMAINS STRONG FOR NOW, after a banner year for stock market listings of private equity-owned firms. The Financial Times writes that shares in private equity-backed companies listed in 2013 were up 18.6 percent by the end of December, “a performance that will fuel institutional investors’ demand as the pipeline of planned initial public offerings grows.” The FT counts “about 60 private equity-backed companies expecting to raise more than $14 billion in 2014,” numbers that should grow significantly if current enthusiasm for the world’s stock markets continues. Meanwhile, The New York Times DealBook notes that in 2013 the amount raised by IPOs in the United States – private equity’s biggest deal market – “jumped 40 percent over 2012, to $59.3 billion.” “Even as the enthusiasm for 2014 remains strong, advisers warn that any number of unexpected developments – a new war, uncertainty over a government debt impasse, an unforeseen market stumble – could damp the prospects for a prolonged renaissance in stock offerings,” leading to a drop in PE-backed exits.
VENTURE CAPITAL IS BACK, declares Fortune magazine columnist Dan Primack, closing out a year marked by increasingly positive press coverage of the long out of favor sector. For over a decade “everyone from entrepreneurs to grizzled venture capitalists” spoke about “the industry’s ‘broken model.’” The context was a VC industry weighed down for more than 10 years by poor investments made during the dotcom bubble, which burst in 2000. Yet in 2013 “the negative narrative flipped with ferocious speed,” driven by successful listings and higher valuations for internet companies. “The turnaround knocked nonbelievers upside the head with giant bags of money and will help enable the next great wave of innovation. Even if tech valuations sag or the stock markets sink, venture capitalists will have full wallets. By proving the cycle, 2013 has created something sustainable for 2014 and beyond.” Many industry pundits believe we are in the early stages of upward cycles for VC fundraising and investment.
CONTINUED SUCCESS IS FORECAST FOR PRIVATE EQUITY IN SUB-SAHARAN AFRICA, following a year that saw the region top the Emerging Markets Private Equity Association’s annual survey of popular geographies for limited partner PE investment. The Sub-Saharan region’s move to the top of the list coincided with the first time in the nine-year history of the EMPEA survey that not one of the BRIC markets (Brazil, Russia, India and China) broke into the top three most attractive emerging markets for investment. Sub-Saharan Africa’s popularity among PE investors looks set to continue in 2014. The FT writes, “Africa’s PE industry with the exception of South Africa, is at a phase of relative infancy and has its share of shortcomings. But factors like political stability, infrastructure growth and rising consumerism have helped spike activity in the continent’s PE hotspots across west, east and southern parts of the continent, fueling optimism for 2014.”
UNCONVENTIONAL DEALS AND STRUCTURES ARE ON THE RISE IN PRIVATE EQUITY. Year-end stories from Real Deals and Reuters detail the marked increase in unconventional ways to raise and deploy capital in PE. As “limited partners have been scaling back their commitments and consolidating relationships,” private equity fund managers, “some of them established, blue-chip names, have fallen between the cracks,” writes Real Deals, which “looks at three
alternative fundraising models that firms have adopted in response to market conditions:” evergreen funds, deal-by-deal structures and bridge funds. Meanwhile, Reuters writes that PE fund managers are increasingly “looking at deals such as minority investments in companies, or partnerships with companies looking to make an acquisition – types of transactions that they largely shunned before the financial crisis of 2008.” “Private equity executives argue non-conventional deals can be more lucrative when full-blown buyouts are expensive. Competition for them is less, as the transactions are custom-made and often do not involve auctions.” In a crowded private equity market, many industry observers are expecting these trends to remain strong in 2014.
AND NOW THE RESULTS OF SOME OR OUR RECENT KEYTRENDS QUICK QUESTIONS:
- Despite Blackstone’s highly lucrative listing of Hilton, 80 percent of KeyTrends’ respondents believe that mid-market deals are in general more appealing than mega-deals.
- Amidst growing evidence that non-U.S. tech venture capital centers are building-up rapidly, half of KeyTrends’ tech investor respondents say they are not investing outside of the U.S.
- 83 percent of KeyTrends’ respondents do not believe dwindling dry powder will be sufficient on its own to lead to falling purchase price multiples in 2014.