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– LBO Funds Close Fewer Deals; Dry Powder Hits Record
– Does PE Face a Turbo-Charged Economy or Recession?
– The Growing Appetite for First-Time Managers
– Cirque de Soleil and TPG, or How to Invest in a Creative Business
– The Momentum Behind GP M&A Builds
– PE KeyTrends Quick Question Results
BUYOUT FUNDS CLOSE FEWER DEALS, AS PE DRY POWDER HITS A RECORD. These are two of the significant takeaways, amid a wealth of information, in Bain & Company’s just released 68-page 2017 Global Private Equity Report. Committed but uninvested capital – known as “dry powder” – for all PE strategies hit a record $1.47 trillion in 2016, up 5.9 year-on-year. Meanwhile, dry powder for debt-fueled leveraged buyout funds rose a steeper 13 percent in the same period to $534 billion. That represents the largest build-up for any strategy over the past year and is a reflection of a significant drop in annual acquisitions, caused in large measure by record high prices for buyouts. Overall, the global value of buyouts dropped 18 percent by number and 14 percent by value last year. The increasing, but still relatively small concentrations of dry powder built up in other PE strategies over the past five years (in growth, direct lending, distressed, infrastructure, etc), can be seen as evidence of limited partner desire to invest in less crowded fields than traditional buyout.
DOES PE (AND THE WORLD) FACE A TURBO-CHARGED ECONOMY OR RECESSION? As Reuters reports, that is one the principal topics of debate at this week’s Super Return Berlin, the world’s largest annual conference for private equity professionals. “Eight years into economic recovery, there’s this feeling that a bump in the road may be coming,” says Warburg Pincus co-chief executive officer Chip Kaye. His firm is putting an emphasis on investing in non-cyclical sectors and putting in place capital structures that “would likely withstand an economic downturn.” While peers like Rob Lucas, managing partner at CVC Capital Partners, share Kaye’s view, others most definitely do not. U.S. President Trump’s proposed tax cuts and his plans for infrastructure spending, deregulation, and the repatriation of domestic corporations’ overseas cash, could lead to a “turbo-charged stimulative environment,” says Leon Black, founder of Apollo Global Management. Another high profile founder of a PE mega firm, Carlyle Group’s David Rubenstein, also believes the global economy could boom, particularly in the energy, healthcare and financial sectors.
NVESTORS HAVE A GROWING APPETITE FOR FIRST-TIME PE MANAGERS, notes Real Deals, amid evidence that inaugural offerings produced better average returns than later iterations. Yet there is a catch: 49 percent of capital committed to first-time managers is going to deal-by-deal structures where investors have the right to opt-in or opt-out of proposed deals. That’s an important post-financial crisis shift. Back in 2008, only 17 percent of commitments to first-time managers went to non-discretionary vehicles. With a record 2,914 discretionary vehicles in fundraising mode, limited partners apparently increasingly want to test-drive the capabilities of first-time managers.
CIRQUE DE SOLEIL AND TPG, OR HOW TO INVEST IN A CREATIVE BUSINESS. In a nearly 4,000-word story, Fortune magazine provides a fascinating take on the promise of creative businesses for private equity, and the special do’s and don’t’s that come with such investments. TPG bought a majority stake in Cirque de Soleil in 2015 for an estimated $1.4 billion. Founded in 1984 in Quebec by fire eaters and acrobats, Cirque was already global when TPG bought it, with 10 permanent shows in North America and eight world-traveling productions, generating some $845 million in annual revenue. Now TPG’s mission is to turn Cirque into a brand like Disney, increasing future revenue and profit several times over. “Just as Disney…started in animation but became so much more over time, Cirque has the ability to do so much more,” says Jim Coulter, co-CEO and co-founder of TPG. If TPG is successful, judges Fortune, “it could rewrite the playbook for expanding creative entities without choking off their artistic inclinations.”
THE MOMENTUM BEHIND GP MERGERS AND ACQUISITIONS BUILDS. After last year’s high profile merger between private equity managers L Capital and Catterton, a similar deal, Unigestion’s acquisition in February of Akina, is once again generating speculation that merger and acquisition activity among PE general partners is set to increase. As reported by Pensions & Investments, the Akina purchase will almost double Unigestion’s PE assets under management to some $6 billion and will give it a significant new client base in North America. The deal also offers both parties economies of scale when it comes to marketing, distribution and regulatory compliance. The costs of all three have been rising in recent years and margins have been squeezed, particularly for small and mid-sized PE managers.