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Private Equity: Looking Back, Looking Ahead to 2020

A new year — not to mention a new decade — provides the opportunity not only to look back at industries, but of course, also to look forward.

Private Equity Review: The Last Decade

The Wall Street Journal reviewed the last decade of private equity, identifying “Ten Trends That Shaped Private Equity Over the Past Decade.” As the WSJ notes: “Ten years ago, the private-equity industry was wrestling with fallout from the global financial crisis and the 2008 collapse of Lehman Brothers Holdings Inc. Dealmaking had slowed from a 2007 flood to a 2009 trickle, while fund managers faced pressure from limited partners concerned about liquidity risks in their portfolios. A decade later, however, the industry has come back bigger and bolder and yet also transformed.”

A new year provides the opportunity not only to look back, but of course, also to look forward with a private equity preview. The trends include:

  • PE firms go public
  • The industry gets regulated
  • Firms embrace ESG (for more on private equity and ESG, see our podcast with Adam Heltzer, Partners Group — ESG, Sustainability & Investing)
  • Fund subscription lines take off
  • LPs go direct
  • Secondary market goes mainstream (for more on the secondary market, see our podcast with Chris Witkowsky, PE Hub & Buyouts — What’s Next for PE?)
  • Operating talent takes center stage
  • PE firms branch out
  • GPs get serious about succession
  • The great GP selloff

Private Equity Preview: 2020

While reviews are entertaining, however, looking ahead is what matters. Here is a roundup of Private Equity previews for 2020:

Bloomberg: Is cash, once again, king?

Bloomberg notes that “Private equity firms are ready to pounce in 2020, armed with a record level of cash.” The post notes that firms “have amassed almost $1.5 trillion in unspent capital, the highest year-end total on record, according to data compiled by Preqin. While last year saw roughly $450 billion worth of private equity deals, Mergers and acquisitions this year could be on a scale not seen since the financial crisis.”

But while strong, is fundraising still on the rise? Perhaps not: “While cash assets are at an all-time high, fundraising has ticked down since the 2017 peak. The amount of capital raised by 2019 vintage funds, or those that began investing last year, was about $465 billion, according to data compiled by Bloomberg.”

Said Graham Elton, chairman of Bain & Co.’s private equity business in Europe, the Middle East and Africa: “We’ve been through a peak in fundraising. Those who will suffer are the ones at the wrong end of the performance spectrum.”

Partners Group: They write that “Offense is the new defense,” adding: “Against a challenging backdrop of low growth and geopolitical uncertainty, we believe “offense is the new defense” in private markets investing. We seek opportunities to build resilience instead of buying it by focusing on assets with value creation potential in sub-sectors with above-average growth rates.”

The firm notes a market split: “The one trend that has persisted is the more pronounced bifurcation we see in the market. Stable, non-cyclical assets are trading at record multiples. Recently, we have witnessed several companies change hands at EV/EBITDA multiples in excess of 20x and, in some instances, even 25x…At the opposite end of the spectrum, we see an increasing number of failed auctions for lower quality assets and/or assets that are perceived as having exposure to cyclicality or disruption risk.”

However, Partners Groups gets more specific around the idea of emphasizing offense in private equity: “More so than ever, identifying sub-sector trends that generate higher top-line growth and value creation opportunities at the asset level is vital for achieving attractive returns. This approach allows us to build more resilient valuations and, in turn, should enable companies to be more insulated from economic swings. Finally, we remain prudent in our underwriting by factoring in multiple contraction for potential investment opportunities.”

CNBC: The business news channel echos Bloomberg’s big cash theme, noting that “Private equity’s record $1.5 trillion cash pile comes with a new set of challenges.”

The challenge? “Analysts say investors are flooding to private equity thanks to low interest rates, hedge fund underperformance, and lower expected returns from public markets…The flush of cash means more competition for the same deals, however, pushing up valuations. Some analysts think returns will ‘disappoint.’”

One opportunity for all that cash? “Many of those opportunities are coming from public markets, where companies are increasingly being taken private — a trend that [Brenda Rainey, senior director of Bain & Co.’s global private equity practice] expects to continue. Those who are already private are increasingly comfortable staying that way, partially because there’s plenty of capital at every stage. She expects more deal activity despite valuations, which are also elevated in public markets.”

Boston Business Journal: Tech remains attractive, so much so that “Private equity will keep on scooping up tech firms in 2020.”

The post notes that “In 2019, the total value of private equity investments in Massachusetts technology firms was the second highest in the past 10 years, and over three times the overall amount in 2018, according to data from Seattle-based data market research firm PitchBook.”

And while “private equity firms have shown a lot of interest of late in Massachusetts technology companies, as shown by a number of six-figure deals that were announced in 2019,” Boston Business Journal notes, “experts say that streak is not likely to stop.”

Coming tomorrow: More Private Equity Preview 2020