March 2, 2018
– Private Credit Assets Will Surpass Those of Buyouts
– “Capital is Abundant, But Time is Scarce”
– Quantifying How Good U.S. Tax Reform is for PE
– Technology is Set to Play an Ever-Greater Role in PE
– Bain’s Much Anticipated Global PE Report is Out
– PE KeyTrends Quick Question Results
PRIVATE CREDIT ASSETS WILL ONE DAY SURPASS THOSE OF BUYOUTS. That’s the prediction of David Rubenstein, co-founder of private equity giant Carlyle. Bloomberg notes in an interview with Rubenstein that the private credit market manages slightly more than one-fifth the amount of assets overseen by the private equity industry. Rubenstein posits that the holdings of private credit will soar as private equity managers diversify product ranges. That’s already happening and it’s not surprising. Assets managed by private credit funds have tripled in five years to some $475 billion. Analysis of creditworthiness neatly complements equity analysis, and extending debt to the same types of companies in which managers invest, keeps PE firms within proven, marketable specialties.
“CAPITAL IS ABUNDANT, BUT TIME IS SCARCE.” That’s the headline of a perceptive Private Equity International editorial that we think captures the market’s zeitgeist. “Frenetic fundraising activity by established brands is putting a strain on limited partners and making it tough for first-timers” to raise capital, writes PEI. “New managers or even established managers looking for a new relationship are struggling to get a foot in the door.” What’s making fundraising tough for many amidst fundraising plenty? “Sideways expansion of blue-chip franchises” into new strategies, geographies and asset categories is taking up much of the bandwidth of LPs who are – ironically – expanding investment programs, “but not their own headcount.” PEI’s conclusion: “The number of funds in market and compressed fundraising timelines are making it tricky [for LPs] to do anything but re-up with existing relationships.”
HOW GOOD IS U.S. TAX REFORM FOR PRIVATE EQUITY? The Wall Street Journal reports that private equity-owned companies will see their values rise by 3 percent to 17 percent on average as a result of the cut in the U.S. corporate tax rate from 35 percent to 21 percent and new rules that permit companies to deduct capital spending immediately. “The biggest winners are going to be U.S.-domiciled companies with 100 percent domestic revenue, a high current tax rate, average-to-low debt levels and high capital spending,” says Brian Gildea, a managing director at Hamilton Lane. Once the debt level at PE-owned companies exceeds more than five times cash flow, or a weighted average cost of debt of 11 percent, the benefits of tax reform decline. Watch for average purchase prices to rise from historic records as increased corporate value is factored into the considerations of private equity buyers.
TECHNOLOGY IS SET TO PLAY “AN EVER-GREATER ROLE” IN PE, states a Private Equity International story, citing the opinions of Suyi Kim, the head of Asia Pacific operations at the Canada Pension Plan Investment Board, one of the largest limited partners in the world. “The next leading generation of GPs are the ones that can adapt and incorporate technology into their investment process and value creation,” says Kim. “As with any disruptive trend, this may appear a fad at the start, but we will eventually see an exponential rise until it becomes the new normal.”
BAIN & COMPANY’S ANNUAL GLOBAL PE REPORT IS OUT. The consultant’s much-anticipated, exhaustive, 78-page report – chock full of statistics covering everything from deal making to fundraising – notes that while private equity’s “structural challenges have sharpened” in the past year, PE “is nothing if not a resilient business.” Bain & Company believes the industry’s toughest challenge is the imbalance between record fundraising and the deployment of capital in deals, many of which fall through because of today’s record high prices. One of the keys to combating high prices, according to Bain, is more deals that add assets on to pre-existing platforms – so called “buy-and-build” transactions. Private equity managers need to act like their corporate competitors by seeking synergies between their portfolio companies, but they need to be “more efficient and aggressive in all respects.” Bain notes that add-on deals for platforms today comprise 50 percent of all PE transactions versus a third a decade ago.