Balance is returning to private equity. Exits are starting to gain traction, fund-raising conditions are improving, and developed and emerging markets activity levels are poised to both rebound and even out.
Last year marked the start of a rebalancing as economic conditions improved in developed markets while the rapid growth rates in many emerging markets slowed. PE investments reached a steady state in 2013 and are expected to rise moderately over the coming year. At the same time, increased availability of debt on very attractive terms, coupled with an increase in dry powder, might suggest a return to pre-crisis days. Nevertheless, concerns around valuations, greater competition for assets and a
relatively low level (supply) of targets will likely keep the market in check.
The most compelling story for 2013 was the return of the IPO market for PE-backed companies. Seeking out strong opportunities in the US and Europe, public markets investors have welcomed PE-backed companies with open arms. PE has opportunistically taken advantage of receptive market conditions and is finally now able to exit some of its largest portfolio companies, many of which date back to pre-crisis times. This is beginning to restore balance to PE portfolios, offering relief to aging investments.
Overall, PE firms in emerging markets are managing to balance exits across the main available routes rather than relying too heavily on a single type of realization.
Stability is also returning to the fund-raising markets. Developed market totals are up, while emerging markets funds are now focused on deploying the high amounts of capital they’ve raised. After a period of strong growth in emerging market fund-raising, LPs are now seeking to build a broad geographic spread of commitments across developed and emerging markets. This is restoring some balance to the outlook for fund-raising.
There likely will still be volatility in the markets. Concerns about the sustainability of the economic recovery prevail, and the effect of tapering off quantitative easing in the US remains uncertain. Nevertheless, PE enters 2014 with increased confidence and a sense of optimism about investment opportunities and the ability to exit and raise new capital, having proven it can react and thrive in difficult market conditions.
Courtesy of EY