PE has started 2014 with a renewed sense of confidence via an improvement in fund-raising conditions, an increase in exit pace and options, and a slow but steady range of available investment opportunities supported by strong debt markets. All of these are trends from 2013 that have followed buyout houses into the new year.
This confidence mirrors the gradual improvement in economic outlook in some of PE’s key markets, such as the US and parts of Europe. And while the World Bank recently cut its GDP projections for key emerging markets, such as some of the BRICs, growth prospects remain strong on a relative basis in most countries, with developing markets expected to generate 5.3% of GDP growth in 2014. This will create investment opportunities across all markets. As a result, we would expect a moderate rise in investment values and volumes globally over the coming year.
An increase in corporate activity will add to the number of investment opportunities available to PE as well as improve exit prospects. Yet, as we’ve suggested in the report, the return of corporations is a double-edged sword in terms of competition for deals, particularly given the large cash sums on company balance sheets. This, together with the intensified competition coming from LPs pursuing direct investment strategies, may cause valuations to rise further. PE will need to remain circumspect about the investments it makes and continue to drive through value-enhancing measures in the companies it backs to generate the kind of solid returns it has historically achieved.
One trend that may emerge as a result of this is an increased partnership between PE and corporates. We may see further collaboration through joint ventures and similar partnershipstyle deals as a means of unlocking investment opportunity to capitalize on the strategic expertise of corporations and the financial know-how of PE.
While we have seen an improvement in exit market conditions, with IPOs continuing apace, PE will need to step up its efforts further to realize on its portfolio investments. If the expected pickup in M&A materializes and the IPO markets remain attractive, there should be plenty of opportunity for it to do so. However, the fact remains that portfolios have aged considerably over the last five years, with the average holding period for recent IPOs nearing 5.2 years, and more than 5.6 years for sales to strategics.
These facts mean that the stage is now set for a more stable PE market, with the prospect of good returns, driven by value-creating strategies.
Courtesy of EY