Private Equity 2020 Outlook: Year in Preview

Yesterday we began our roundup of a preview of private equity 2020. Today, the outlook continues.

Lincoln International: The firm surveyed more than 160 global private equity investors, noting that their “number one priority is deploying capital.” The report further notes that “recession resilient industries attract dry powder,” meaning that “business services, technology, and healthcare sectors expect an infusion of capital in 2020.” The post then lists various sub-sectors that are “getting the most attention.”

What is the 2020 private equity outlook? We offer a roundup of views.
The 2020 clock has started ticking for private equity

But the survey indicates caution. Lincoln International notes: “After what appears to be a very strong finish to 2019, over half of respondents… expect market deal volume to remain flat in 2020 (51%)… Investors feel cautious coming into 2020 with a full 80% expecting valuations to remain flat or drop slightly from historically high levels.” The main causes: political uncertainty and economic worries across the globe.”

Wall Street Journal: Echoing Lincoln International’s warning about politics, WSJ reports that “Private-Equity Deal Making Could Slow Up as Election Day Nears: Political risk over the election’s outcome could lead to a busy start to the year followed by a buyout slowdown later in 2020.”

The post continues: “Some industry experts say the perceived risks associated with the election could reverse that trend, even if only temporarily. The private-equity industry has already found itself a target of presidential candidates such as Sen. Elizabeth Warren (D., Mass.). Last summer, she co-sponsored the Stop Wall Street Looting Act, which proposed dramatic changes in how the industry operates, particularly in its use of debt to fund deals. Other factors, such as possible changes in tax policies as well as tariff threats and potential public market volatility also have concerned sponsors.”

Cambridge Associates: Yesterday we highlighted that one of the top trends over the last decade was that “Secondary market goes mainstream.” Looking ahead, Cambridge Associates expects the trend to ramp up, stating: “Secondaries No Longer Relegated to the Kids’ Table.”

The report notes: “Some experienced investors have long used secondary transactions to shape their private investment portfolios, but in 2020, these deals could become mainstream. Ten years ago, high-profile institutions with liquidity challenges made headlines by tapping these markets, but for all of 2009, Greenhill & Company toted up only $10 billion of secondaries. Today’s market is roughly nine times larger (private equity assets only doubled during the trailing ten years), and secondary funds have $169 billion in estimated buying power.”

The post also notes upcoming key risks for 2020: “Transaction prices are high on average, at 89% of NAV during the first half of 2019. Given full values, leverage is commonplace across secondary funds. One-third of deals are now GP led, according to Greenhill. These deals may have a poor reputation, but now some high-quality GPs are using them to preserve valuable assets when funds wind down.”

Pitchbook: They offered their “Private Equity Outlook forecasts trends that will shape the PE industry in 2020 and reviews predictions from 2019.” The 2020 predictions include:

  • PE fundraising will fall below 2019 totals.
  • We will see another acquisition of a major alternative asset manager.
  • GPs will increasingly hold some of their top-performing assets longer.
  • The big four public GPs will expand their strategy offerings at twice the rate of comparable GPs.
  • Sovereign wealth funds and pension plans will become more sophisticated investors, increasing control over investments.
  • VC-to-PE buyouts will continue to proliferate.
  • There will be continued expansion in growth equity deals.

Partners Group: The firm also looks at the debt market, noting that “despite signs of slowing global growth and rising volatility in capital markets, demand for private debt remains strong, with total assets under management at a record high. Although senior loan issuance has eased in 2019, the private debt market continues to be borrower-friendly. Loan documentation in many parts of the market is weak, with high shares of covenant-lite structures in the syndicated space. In this environment, underwriting discipline and access to attractive transactions remain key. This means having strong relationships with sponsors to help source transactions and the ability to provide comprehensive, tailor-made financing solutions at an appropriate risk-adjusted pricing.”

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