How much longer can private equity thrive?

Author: Jimmie Franklin | Published: 3 Jul 2019
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Amid an M&A and IPO slump, private equity is experiencing continued success. While other financial sectors have wrestled with political volatility such as Brexit uncertainty and economic setbacks like the China-US trade war, private equity fundraising appears to continue spiralling.

"Private equity is a massively growing asset class that has seen real outperformance," said Kristina Widegren, principal at fundraising advisory firm Rede Partners. "Allocations are still increasing on a yearly basis, and it is delivering a considerable amount of new capital to the industry in terms of limited partners (LPs) looking to invest more in private equity."

She continued that this then fuels a healthy fundraising market. At the same time, she said, "it has been a benign market in terms of where we are with the economy. This has resulted in private equity funds performing very well".

According to Widegren, general partners have been returning considerable capital to their LPs, and thus have large inflows coming back to them.

"There is a degree of discussion in the market about whether or not there will be a correction, when it will come, and what it will look like," said Linklaters partner Matthew Keogh. "The market thus far has generally been pretty optimistic on the fundraising side."

Keogh continued: "On the deal side, commentators have been noting high asset valuations creating attractive uses for capital…spending isn’t as straightforward as it used to be, but very big deals are still being done."


• Private equity is continuing to be a success story for stakeholders;

• Fundraising seems unlikely to subsist just yet;

• Commentators predict storm clouds ahead, which could see a potential downturn take place;
• Mega-funds will continue to benefit from their size.

His thoughts were echoed by Tom Whelan, partner at Hogan Lovells."There is a lot of investor money out there looking for a home," he said. "If you’re going to raise a fund, now appears to be the prime time to raise one, while investors have cash to deploy."

While Whelan can’t be sure if an economic downturn will take place, he speculated that "if there is an economic downturn next year and you have raised a fund, then you’ve got committed capital plus the opportunity to potentially buy assets more cheaply".

But, he added, "you’ve got to be convinced by the value proposition and that value isn't going to fall further. If players feel that a correction is coming, they will price deals accordingly."

He also pointed out that "there is nervousness among some players about a possible correction, as no one wants to be caught with their pants down in this kind of economic situation. When the ocean has pulled out and you’re left there baring all, it is not good for your funders or your fund, and could dent your ability to raise new money."

Market correction is coming…

"People are wondering how much longer the music will keep playing for," said another source who works closely with private equity firms. "Potential slowing of the economy is making some financial players want to get in before they risk losing out. They want to take advantage of conditions whilst they’re good."

Widegren added: "From a private equity perspective, clearly we are in a good place at the moment. This is in terms of funds deploying, delivering and returning capital to investors. Investors are seeing very good returns on their capital. This does however pose the question about where we are in the cycle."

She continued: "Prices are high, but as yet worries about the cycle are not having an impact on fundraising."

In her view, private equity is better-equipped than other elements of the financial sector to cope in an economic downturn.

"It is a longer term investment and, as a private asset class, your ability to implement changes are higher which means within that environment, it is viewed as an attractive asset class," she explained.

On the horizon

"Again, when thinking about the amount of capital raised in recent years, there is a sense among limited partners that this should at least normalise or even slow down," said Widegren. "This is something we should all be quite conscious about."
Her comments were reaffirmed by those of Keogh, who said he expected funding to remain strong. 

"In Europe, many mega-funds are due to come back to market in the next twelve months or so," Keogh said. "In addition, some of the big houses have been, and are increasingly looking to diversify their current product mix, which is a trend we’ve seen some of over the last few years."

"When the ocean has pulled out and you’re left there baring all, it is not good for your funders or your fund, and will dent your ability to raise new money."

Keogh also pointed out the benefits of mega-funds to firms with large amounts of dry powder at their disposal. 

"This goes right the way up the value chain from the mid-market, where the major funds can compete, all the way to the top of the market," he said. "There is quite a lot of flexibility in the kinds of deals that can be done and the nature of the contortion that can be brought together."

According to sources, there is a desire – and a need – from limited partners to increase their allocations. This is seeing mega-funds attracting large pools of capital.
"In today’s market, where those are performing very well, there is a question from the larger limited partners about why you should take a risk with a smaller fund when you’re getting strong returns from larger funds," said Widegren.