– Four Factors that May Triple Forecast PE Growth
– ALPERS Explores Investing Directly in PE
– Buyout Dry Powder Hits Record
– Platform Deals are the New Buyout in Europe
– Evidence that First-Time Funds Outperform
– PE KeyTrends Quick Question Results
FOUR FACTORS THAT MAY TRIPLE FORECAST PE GROWTH over 10 years are detailed in a Forbes column by Palico chief executive Antoine Drean. Private equity assets under management will rise to $15 trillion from $4.3 trillion today “if historic growth rates repeat.” The pace will accelerate 1) if efforts to create a vibrant secondary market for unicorn stakes – shares in private companies worth $1 billion or more – succeed; 2) if public market money managers turn to PE to boost profit, as a growing share of stock market capital goes to low margin index trackers; 3) if large money managers pave the way for individual PE investment; and 4) if the expansion of the market for secondary fund stakes (distinct from the secondary market for portfolio assets) makes it easier to dump unwanted funds. Meanwhile, a Real Deals column predicts years of exceptional PE growth tied to low interest rates and the inability of passive strategies to deliver good returns. As PE “morphs” from “cottage industry” to “industrialized business,” opportunities and pitfalls will open up for managers, notes the Real Deals column.
A MOMENTOUS DECISION LOOMS FOR CALPERS, AND FOR PRIVATE EQUITY. Pensions & Investments reports that the largest pension fund in the U.S., the California Public Employees’ Retirement System, will consider “cutting out” fund managers and “making private equity investments directly.” Faced with difficulty accessing “top-performing PE managers,” who are frequently oversubscribed, CALPERS is considering “cost effective” alternatives to classic fund investment, including much larger commitments to low-cost co-investment and separate accounts. The bellwether investor’s ultimate decision regarding direct deals and these other alternatives is almost certain to influence the investments of many other public pension funds. Today, no U.S. public pension fund runs a direct investment program, though peers in Europe, the Middle East and Asia do. Managers can take some comfort from the fact that no decision is imminent. The review will take years, according to CALPERS.
BUYOUT FUND DRY POWDER HITS AN ALL-TIME RECORD. Bloomberg notes that at $862 billion, unspent capital committed to private equity buyout funds – known as dry powder – is up 14 percent from last year, contributing to heated competition for assets and historically high deal pricing. Record dry powder is spurring manager creativity and an acceleration of the trend towards specialties. “In this market, it is important to identify investment opportunities with a unique angle and to avoid broad auctions where the highest bidder simply wins,” says Daniel Zilberman, a managing director and head of Europe at Warburg Pincus.
“PLATFORM DEALS ARE THE NEW BUYOUT IN EUROPE,” declares Private Equity International. In its coverage of a report from Silverfleet Capital, PEI notes that so-called “buy-and-build” transactions in Europe – where managers acquire companies that serve as a platforms for the bolting on of subsequent acquisitions – rose 59 percent to 325 in the first six months of 2016, versus the same period last year. “The findings show that add-ons by European PE-backed companies have risen much faster than the buyout market, which has been almost flat,” comments Silverfleet’s “Buy and Build Monitor.” Observes Neil MacDougal, Silverfleet managing partner: “It’s clear that PE firms are strongly encouraging their portfolio companies to make add-on acquisitions to help average down high entry prices,” drive cash flow up, “and generate investment returns.” Average valuations for mid-market companies are 11 times cash flow, but valuations for add-ons are six times cash flow.
EVIDENCE THAT THE MEDIAN FIRST-TIME FUND OUTPERFORMS the median successor fund is found in a Real Deals story covering fund performance from 2000 to 2012. Over that period, debut funds posted better median net annual returns than all other types of funds, with the exception of 2004. First-time managers are often hungrier for success – and a share of capital gains – than established managers. Investors have “warmed to first-time funds as the pressure to find attractive investment opportunities has increased,” writes Real Deals. Another factor aiding first-time funds is a general perception that a manager’s ability to follow up a top-quartile showing with a similar performance is harder than it once was.