Institutional investors will buy stakes in private equity companies

Date: 20 Oct 2016


Ian Barnard, partner at Capital Generation Partners also says low private equity returns will mean investors look for better returns in direct investing

Is there too much cash in the private equity sector?

Private equity general partners (those who raise capital from cash rich institutional investors) will tell you that the problem is not that there is too much cash but that there are insufficient attractive deals. They are, though, two sides of the same coin. Central bank policy has forced investors out along the risk curve. This process has been going on for years and, now, the wall of money has arrived at the door of private equity. General partners are raising their largest ever funds. Thus far, however, good managers have exercised discipline in spending their money. But good managers will also tell you that, regardless, future returns will be muted compared to those in the past.

How will Brexit uncertainty affect sales of UK private equity backed businesses?

The relative winners in the aftermath of Brexit will be UK businesses with an export trade. Good UK private equity managers have built portfolios of companies with some non-sterling revenue. Those businesses exposed to domestic demand may have a trickier time in the medium term and we expect to see the better private equity managers intervening in portfolio companies to re-position their business post-Brexit.

Are corporates willing to spend more money on buyouts than private equity companies?

We are seeing strong demand from strategic buyers. This is good for GP’s (general partners) selling assets but adds competition to them trying to deploy the huge funds that they have raised. Generally strong stock prices and high cash levels support corporate buyers. They are choosing to deploy their cash by adding existing businesses rather than organic investment in new capacity.

Is bank debt difficult to obtain for private equity houses? What impact does it have on investments and returns?

Debt is generally available to private equity houses with good track records. Indeed, one of the reasons company managements team up with private equity sponsors is to gain access to debt, particularly in the small and mid-cap buyout area. Whilst debt multiples have risen, the balance sheets of portfolio companies are generally not as levered as before the crisis as the equity contribution remains strong. But expected returns will be lower than in the past.

Any trends you can tell us about?

Private equity is a mature business reflected in the relative ageing of many key persons. We expect to see more deals where institutional investors buy stakes in private equity GPs in order to allow ageing founders to cash out. Then, established private equity businesses will continue to diversify their product offering. In particular, we expect managers that, over time, have grown out the small and mid-cap space to return to this sector by launching mid funds alongside their now larger cap offering. Finally, low expected returns will lead more investors to experiment with direct investment models, removing private equity partners.

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