Can’t keep track of ‘bubbles’? Well it just got a little harder because you can add Private Equity to that list (maybe)!
Almost everybody knows that private equity is in the midst of a big boom as high-net-worth individuals and institutions pile into alternative investments in search of yield and diversification. According to a recent article in Chief Investment Officer, it is also appearing increasingly likely that private equity markets are in a bubble as asset valuations in some sectors are reaching all-time highs.
CIO’s Alexandra DeLuca points out that although almost nobody in the PE industry is willing to utter the “b-word”, the PE market is clearly looking frothy after a historic run and a few sectors and asset prices in a few sectors have likely gotten ahead of themselves.
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2014 banner year for private equity funds
2014 was a great year for the private equity industry. First, exits from buyouts hit a record $450 billion, according to Bain Capital. Preqin also reported that fundraising hit nearly $500 billion as private equity and venture capital AUM set a new all-time-high of more than $3.2 trillion as of June 2014. Cash flooded the market, mainly to top-tier funds, and “dry powder” (unallocated investor capital) also hit an all-time high of $1.2 trillion in December of last year.
Although PE fundraising has slowed down a little in the first half of this year, industry insiders say business remains brisk and they are expecting more fundraising in the second half.
PE reaching a top, but not a full-grown “bubble” yet?
Most market analysts and PE professionals do not believe (or at least will not publicly admit) that PE is in a “bubble”. Some will admit that some of the valutaions sen in recent deals are much higher than they would be willing to pay.
Ben Cukier (who had 16 years at FTV Capital before leaving early this year to launch Centana Growth Partners) says that several deals signed in the last couple of months do have him perplexed in terms of valuation. In an interview with Chief Investment Officer, he notes: “Is the stock market in a bubble or is private equity just overpaying for everything they buy? My personal opinion is that there are a lot of people paying prices I wouldn’t pay for assets, but there are lots of assets still trading at good prices.”
PE is in a boom not a bubble due to inefficient markets
The private equity community has developed a number of explanations for why the current PE boom is not a a bubble. DeLuca highlights one commonly expressed view that the current boom is related to the fact that the private equity market has in effect become a proxy for going public. The argument goes that there is enough liquidity that the OE market has become notably efficient than in the past, and, moreover, the regulatory burden associated with an initial public offering is also notably less than a few years ago.
“It is not a symptom of a bubble per se, but because of some of the inefficiency of the public markets,” Cukier commented in explaining the argument. “If you believe the theory that the private equity market is becoming a replacement for the public equity market, it actually has a long-term raison d’être.”