[ I N - D E P T H
|
M A C R O
V I E W ]
t first glance, private equity is seemingly at
the top of its game. Very little capital
invested in the pre-crisis boom times
remains stuck in difficult to realise deals, as
managers were able to ride the subsequent
bull market wave, and started exiting around 2013. The overall
asset class has done well, and has routinely beaten public market
returns.
With such enviable gains, investors seemingly cannot get
enough of private equity. “The low returns available in other
asset classes because of the current state of interest rates and
the proven and consistent ability of private equity to deliver
good performance means flows have been strong,” says Mi-
chael Collins, chief executive of Invest Europe, a private equity
industry association. “Institutional investors have performance
expectations and needs, and if they are unable to obtain returns
from fixed income, then they will look around and private equity
“The reality is that when the next economic downturn comes,
the fundraising and dry capital will be put to work into
distressed and other types of deals.”
CESAR ESTRADA, HEAD OF PRODUCT MANAGEMENT FOR PRIVATE EQUITY AND REAL
ESTATE FUND SERVICES, STATE STREET ALTERNATIVE INVESTMENT SOLUTIONS (AIS)
is attractive.”
A BNY Mellon report – “Split Decisions: Institutional Invest-
ment in Alternative Assets” found private equity to be the most
favoured asset class among clients, accounting for 37% of their
exposure, followed by infrastructure (25%), real estate (24%)
and hedge funds (14%). “Flows from pension funds, insurance
companies and funds of funds into private equity have been
strong. I expect we will see more capital coming in from insurers
as regulators are considering reducing their Solvency II risk
weighted capital charges on private equity holdings,” added
Collins.
Meanwhile, a report by Bain & Company said $589 billion was
raised by private equity firms in 2016. While this was 2% less
than in 2016, it is important to note that private equity has not
failed to raise less than $500 billion in a calendar year since
2013, and this excludes flows into separately managed accounts.
Making it rain
The industry has never had more cash at its disposal, with
Preqin saying private equity now looks after $2.49 trillion while
private capital (defined as buy-outs, growth, venture capital)
runs $4.46 trillion as of June 2016. “There is so much money
flowing into private equity at the moment, and many funds are
oversubscribed and fundraising targets are being met in record
time,” says Melanie Cohen, global head of private equity and real
estate at Deutsche Bank Fund Services.
But is this as good as it is going to get for the asset class? With
10
Global Custodian
The Private Equity Issue 2017
enormous flows coming into the industry,
the challenge for dealmakers is putting
the money to work. Bain & Company
highlighted there is a record $1.5 trillion
in dry powder flushing around in the
private equity industry globally. In such
an environment, private equity managers
are finding themselves under growing
pressure to invest, even if the assets are
overvalued. Investors are clearly worried
about high valuations, with 70% telling
Preqin it was one of the key issues the
industry was grappling with.
“There is a lot of money chasing fewer
deals and listed equities have very high
valuations, so it is becoming harder to
identify returns through traditional pri-
vate equity strategies. There is pressure
from investors on GPs who are sitting on
dry powder to make capital allocations,”
says Chirag Patel, head of innovation and
advisory solutions for EMEA at State
Street Global Exchange.
Many in the industry are predicting
that private equity could take a hit on
assets that they simply paid too much for,
particularly as equity markets are well
overdue a correction. Any number of
events could cause the equity market to
take a pounding.
“I do not disagree that there is potential
for a possible crash in financial markets,”
says David Bailey, co-founder at Au-
gentius, a private equity and real estate
administration business. “When I look
around the market, I see overvaluations in
some of the high-tech equities and I hear
anecdotally of managers struggling to
strike deals. Unlike the previous recession
in 2008, and the two or three before that,
I feel central banks have a better control
of the situation now than they did before.”
Can it weather a storm?
Others acknowledge that private equi-
ty will be able to weather an economic
downturn. “It is true that some private
equity managers are paying high multi-
ples for deals and this is high by historical
metrics and trends,” says Cesar Estrada,
head of product management for private
equity and real estate fund services at
State Street Alternative Investment Solu-
tions (AIS). “But the reality is that when