European PE firms are staying true to the core model of being disciplined, highly selective and hands-on investors — just as they have through the economic cycle. They have also been building their own businesses through embracing the opportunities of greater sector focus, moving into new markets, expanding their investor and operational teams, and fostering rising talent.
Six years on from the onset of the financial crisis, it is clear that PE has not only weathered the economic storm but has emerged relatively unscathed, largely because of its unrelenting focus on creating sustainable growth in each of its investments. Despite this, the industry still has its detractors. Now that European PE is a regulated, mature industry that has become an established part of the economic landscape, it’s high time that the debate moved on.
There is more that PE can do to shift the narrative to a more positive tone. As we’ve demonstrated in all our studies, the industry has a good story to tell. Moves to build in-house investor relations and communications teams have helped professionalize PE’s engagement with all stakeholders. However, the industry needs to build on its work to improve transparency and disclosure through greater collaboration at a national and European level. Momentum is starting to build on these efforts, in many cases led by the national and European associations, but further development relies on the continued involvement of PE firms at an individual level.
European PE is adjusting to the new regulatory environment and is making good progress on implementing the requirements imposed by AIFMD. This is helping to institutionalize and standardize procedures and processes within PE firms and puts in place third-party oversight of funds. These developments may not be welcomed by all, but over the longer term, they should help PE to validate its record of value creation and its ability to achieve above-market returns for its investors.
The European IPO staged a comeback in 2013, and so far, 2014 looks as though it will be another strong year for exits on the public markets. While it is highly likely that the number of exits via IPO will surpass that of last year, PE will need to manage these exits with care: there are some signs that the headiness of the markets that characterized 2013 is now starting to abate.
At the same time, a deepening and further development of the European credit market means that secondary buyouts will continue to be a good exit route for PE, including for some of the larger companies in the portfolio. The outlook for M&A is also promising as corporates are picking up their activity levels, which should provide both exit and new investment opportunities for PE — and will help to normalize PE exit activity over the coming years.
New investment will be supported by the improvement in the fundraising market, where totals are beginning to reach levels not seen since the crisis. There is evidence that this pickup is the start of a long-term trend: LPs continue to be attracted by PE’s long-term performance record and are increasing their allocations to the asset class.
Overall, the outlook for PE is positive. The conditions around the industry are improving on all fronts — there is a greater availability of equity and debt capital for investment, a steady pickup in the economic environment, a shift in the perception of the role PE has to play in the European economy, and, in mid-2014, strong activity in two of the three main exit routes.
Courtesy of EY