Thursday, 01 March 2018 13:23

Global Private Equity Report 2018

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Overall, 2017 delivered very good news for the private equity industry. It was a year of increasing investment, strong exit markets, attractive returns and hot fund-raising activity. All of this good news has attracted so much attention (and capital), however, that the industry’s structural challenges have sharpened. If it’s possible, fund-raising has been too good, with an unprecedented $3 trillion raised over the past five years. Investment dollars are indeed up, but deal count has dropped substantially since 2014. Multiples are at all-time highs, with around half of all companies acquired priced in excess of 11 times earnings before interest, taxes, depreciation and amortization. In such a frothy environment, how can funds generate the attractive returns their limited partners expect?

First, we need to remember that “the end of private equity as we know it” has been proclaimed before. Over the past decade, we’ve confronted the specter of large-scale insolvency in portfolios, debt refinancing cliffs that seemed impossible to scale, lower returns that bit into LP confidence, and exit issues amid market volatility and buyer-seller valuation gaps. Each time, the PE industry has responded by continuing to evolve and continuing to deliver for its constituents. Private equity is nothing if not a resilient business.

So, how is the industry responding to the current situation? As ever, funds are turning to a mix of tactics and strategies. On the tactical side, we see general partners aggressively assessing and measuring portfolio management talent, an area where the margins for error are thin and getting thinner. They are also exploring how the pace of technological change is altering industry profit pools, with an eye toward taking advantage of new opportunities before others see them and avoiding pitfalls prior to investment. The GP mindset around assessing risks and opportunities over a typical holding period hasn’t changed. Yet funds do require new tools and lenses to understand how technology affects industries, as evidenced by the rapid ascent of Amazon and its impact on retailers, consumer products companies, distributors, equipment manufacturers and many other businesses. The good news is that these changes and shifts can all be analyzed and understood.

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