– Ten Predictions for Private Equity in 2017
– U.S. VC Fundraising Hits a Ten-Year High
– U.S. Gov’t Tax Intentions Keep PE on its Toes
– Fitting PE into Defined Contribution Plans
– Ever Wonder What PE Firm is the Best in the World?
– PE KeyTrends Quick Question Results
HERE ARE TEN PREDICTIONS FOR PRIVATE EQUITY IN 2017 from Forbes columnist and Palico chief executive Antoine Drean. Among the highlights, Drean forecasts that relative allocations to private equity will rise, given the results of surveys on investor intentions; the value of venture capital investments will increase, as unicorns – private companies worth $1 billion or more – continue to get support from private market investors; annual volume in the secondary market will hit an all-time high as part of long-term secular growth that is bringing in more monied buyers and greater numbers of sellers; China may prove to be the best PE value of 2017; mergers among PE fund managers will accelerate; and – no surprise here – electronic marketplaces like Palico will continue to grow strongly.
U.S. VENTURE CAPITAL FUNDRAISING HIT A TEN-YEAR HIGH IN 2016, reports Pensions & Investments. VC firms raised $41.6 billion for 253 funds last year, about 19 percent more than the $35 billion committed to 255 funds in 2015. The figures support the idea that investors are writing bigger checks to fewer managers as they rationalize portfolios by eliminating subpar performers and overlapping strategies. Fundraising momentum may be faltering, however, as concerns regarding technology company valuations persist. Fourth quarter 2016 VC fundraising of $7.8 billion was off 33 percent from the same period the year before, and 24 percent below the level achieved in the previous three months.
THE U.S. GOVERNMENT’S TAX INTENTIONS KEEP PE ON ITS TOES. President Donald Trump has frequently decried the low 20 percent tax rate that private equity managers pay on their share of investment vehicles’ profits – about half the rate the typical manager would pay on traditional income. Bloomberg now says Trump could get rid of “the carried interest tax break” simply by executive fiat, a tool he might resort to if he encounters resistance to changing the rate in the Republican-controlled U.S. Congress. While Bloomberg elaborates on this thesis, the Financial Times examines the likelihood of the U.S. Congress removing the tax deduction for interest on corporate debt, a potent profit generator for buyout firms. With the “most consequential U.S. tax reform in a generation” under consideration, interest deductibility is “in the crosshairs” of legislators, declares the FT. Time will tell if there are any significant U.S. tax changes for private equity, but given the high volume of past talk, followed by inaction, don’t be surprised if nothing happens.
FITTING PE INTO DEFINED CONTRIBUTION PLANS IS DOABLE, BUT NOT EASY. Private Equity International reveals that the average private equity allocation of defined contribution pension plans – investor-controlled schemes where the size of contributions, but not ultimate benefits, are defined – is just 2 percent. In sharp contrast, the average allocation for defined benefit plans – discretionary, commingled retirement funds under the control of professional investors where final benefits, but not contributions, are defined – is 17 percent. The challenges enumerated by PEI when it comes to defined contribution investment in private equity focus mainly on the asset category’s lack of liquidity and rely heavily on the findings of a recent Partners Group study. For PE to fit better into DC plans, investments should rely heavily on listed private equity funds and credit and infrastructure strategies that produce a yield. Pantheon, which like Partners Group, is one of the most prominent firms trying to find ways to boost DC investment in PE, claims the typical pensioner could be missing out on nearly $180,000 in additional capital by not investing in the asset category.
HAVE YOU EVER WONDERED WHAT THE BEST PE FIRM IN THE WORLD IS? Well if you have, here is a candidate: Dutch fund manager Waterland. Private Equity International reports on an HEC business school study carried out by industry guru Olivier Gottschalg that named Waterland “the best performing private equity fund in the world.” The study used data from a relatively small sampling of 446 firms and 791 funds raised between 2002 and 2012. Variables examined include annual return, the ratio of investment distributions to paid-in capital and the ratio of total fund value to paid-in capital. “Disciplined execution of an intensive buy-and-build strategy, and an entrepreneurial approach focused on actively supporting companies in organic and external growth” explains Waterland’s success, according to Frank Vlayen, the firm’s chief executive. Vlayen adds that returns of three times invested capital are “not uncommon” at Waterland.