Over the last few years private equity has grown enormously as an asset class and played an increasingly important role in M&A activity. Our research shows the sector has record assets under management – nearly $4 trillion – and that its “dry powder,” in other words the amount that it has available to invest, is also growing.
As the leading global provider of data and intelligence for all those involved in private equity and M&A, we’ve identified a number of key trends in the sector, some of which are currently underway, while others will unfold over the coming years.
One fundamentally important trend shows how, over the last few years, money has been flowing out of rather than into private equity. Until around 2012, private equity firms were calling up more cash from their investors to invest in companies than they were returning. Since 2013, though, the amount of capital distributed to investors has surpassed capital calls and has reached record levels, as fund managers have used favourable market conditions to exit many portfolio investments. This is, of course, good news for investors who are now seeing good returns on their investments.
Certainly private equity has been a good bet for investors. According to our research, taking a base line of 100 in 2000, the return with the S&P 500 Index would, for instance, be just over 200 by 2015. Across all private equity strategies, this return would be just over 300, but with buyout funds it rises to 400. Unsurprisingly, when we asked investors in June to reveal how satisfied they were with their investments, 35 per cent reported that private equity has “exceeded their expectations”; meanwhile only 13 per cent felt it has “fallen short of expectations”.
Now, with $1.3 trillion of dry powder in their pockets, private equity firms are looking for the right investment opportunities and this is good news for businesses of all sizes looking for capital. So private equity is serving both companies and investors well and will, we believe, continue to grow. But within this growth story, there are some interesting new trends emerging which investors, companies and those working within the M&A space should be aware of.
Venture capital (VC) funds have performed very well and the number of deals being supported has increased significantly. Startup businesses such as Uber and Airbnb have attracted huge amounts of capital and media coverage. In June Airbnb raised $1.5 billion of funding led by new and returning investors.
Less prominent but equally interesting, as it typifies the current vibrant market, is a deal involving Poundworld, the West Yorkshire-headquartered chain of discount retail stores which sells electrical products, groceries, toiletries and other consumer goods. In March private equity firm TPG bid to acquire a majority stake in Poundworld for £120 million. By the time the deal was completed in May, the company was valued at £150 million. Preqin has logged 12,217 buyout and VC investments worldwide during 2015, and private equity funds still have a lot of dry powder ready for similar investments.
Following a period of strong fundraising, we calculate private equity now has around $1.3 trillion to invest
A second important trend has been prompted by the current relatively low-growth economic environment. For investors this means that finding growing businesses is increasingly challenging, but also increasingly interesting. Today private equity firms are much less interested in complex financial engineering and using leverage, and much more interested in finding growing companies to invest in.
Almost all the private equity firms we’re following are putting considerably more effort into growth strategies. This means finding small and medium-sized businesses that they can invest in whose management they can work with closely to develop the business in the longer term. Great news for owners and managers of growing firms.
As I’ve mentioned, this is a sellers’ market at a macro level, but following a period of strong fundraising, we calculate private equity now has around $1.3 trillion to invest. We’ve also noticed that increasingly, when private equity does invest, it’s not just providing capital, it’s providing smart capital. In other words, it’s supporting management in the growth phase, providing advisory and consulting services.
Here’s another interesting trend. As everyone knows, growing businesses need funding of different types at different times. Equity is important, but companies also find themselves needing to borrow. Banks are much less likely to provide loans for businesses than they used to be.
So, we’re now seeing private equity and, more generally, private capital firms stepping in to provide these loans, which are funded by investors. This new activity is already significant and is on the rise, providing new opportunities for investors and growing-fast businesses. It also means that for M&A, those looking to make acquisitions can now access both equity and loans from private equity firms.
These are exciting times as private equity offers investors, businesses and those involved in M&A a variety of new options. However, as we know from talking to our clients around the world, whatever the type of deal, in order to be successful from the point of view of all three players – investors, private equity firms and businesses – it must be based on accurate, comprehensive and timely information.
Preqin is the alternative assets industry’s leading source of data and intelligence. Its products and services are utilised by more than 38,000 professionals located in over 94 countries for a range of activities including investor relations, fundraising, marketing and market research. Founded in 2003, it has offices in New York, London, Singapore, San Francisco and Hong Kong, and is an independent business owned by its directors and employees.