Private Equity Fundraising Remains Strong Despite High Prices For Assets by Bailey McCann, Opalesque
At the end of June, Palico, released a survey on current trends in the industry. The online private equity marketplace polled 106 limited partners and 179 general partners between April 25 and May 27, 2016, for their views on the market. Not surprisingly, there was some divergence between LP and GP views of how things are going this year, but overall both groups expect 2016 to be another good year for private equity.
Fundraising continues to be strong. According to the survey data, over three-fourths of LPs and GPs in the survey expect fundraising to meet 2015 levels. 2015 was a record year for private equity fundraising, marking a new high since the financial crisis. “We’ve seen a really strong fundraising environment over the past three years,” Kevin Campbell, Managing Director and Portfolio Manager, Private Markets at $2.7 billion DuPont Capital Management tells Private Equity Strategies. The Wilmington, Deleware-based firm considers some 400-500 private equity groups per year for investment and has a strong value orientation. Campbell says he expects the current pace of fundraising to continue, but it will be challenging for GPs to find places to put all of that money.
Even though the market for deals may be challenging, the strong fundraising market appears to be too tempting for GPs to avoid. “We’ve noticed that GPs are coming back into market fundraising for their next fund much earlier which is concerning in some cases,” adds Graham McDonald, Head of Private Equity at London-based $428.2 billion Aberdeen Asset Management. Aberdeen invests $32 billion across all alternative asset classes including private equity. McDonald says that in some cases, GPs have returned to market before prior funds are significantly invested – “investors could push back on re-upping into a fund if the terms are too unfavorable and prior vintages aren’t fully invested.”
2015 was a record year for acquisition valuations in addition to fundraising. Purchase prices in the U.S. and Europe hit a record of more than 10 times acquired company cash flow in 2015. 79 percent of LPs and 75 percent of GPs in the survey expect average pricing for PE-backed acquisitions to stay the same or rise in 2016. Those high prices make it a sellers market, which could make it difficult for GPs to get the kind of low entry prices they need to make the most of all their newly raised capital.
Even with high asset prices impacting dealflow, GPs have retained the advantage in negotiations with potential investors. Private equity is still one of the few asset classes posting consistently high returns, making for a competitive environment among investors who want access to the best funds. With so many investors wanting in, GPs have been able to get rid of key metrics like hurdle rates and have renegotiated some fees.
If investors want better terms, they may have to act as a group, but Aberdeen’s McDonald says that’s hard to achieve. “LPs have never been good about acting in unison when it comes to getting more favorable terms so it is easy for GPs to pick them off and maintain the upper hand on terms,” he says. Even if LPs acted in groups, GPs seem to think they would be able to maintain control. Survey data shows that 57 percent of LPs readily believe that making demands as a group could help them, but only 34 percent of GPs agree.
Regs Watch: The Impact of Brexit on Global M&A: Perspectives from the UK, US and Europe
by Jonathan Angell, Douglas L. Getter, Berthold A. Hummel, Eric S. Siegel, Charles Cardon and Ross L. Montgomery- Dechert LLP
The British public voted to leave the European Union on Thursday 23 June. What happens next is far from certain. The implications for global M&A markets are, accordingly, equally far from certain. The volume of M&A transactions undertaken in the UK for the six month period prior to the Brexit vote was down almost 70%. Against this back drop, the only certainty is uncertainty, at least for the short term. Below we set out our analysis of what the implications may be in certain major M&A markets.
Expected Key Impacts
- A continued drop off in M&A activity in the UK as the climate of uncertainty continues
- Likely changes to the UK’s interaction with the EU regulatory framework relating to capital markets
- Potential increase in US listings of European companies
- Weakness of the Pound Sterling (and potentially the Euro) making UK/EU targets more attractive to overseas bidders
- Increased regulatory hurdles (for instance in relation to antitrust approvals) in pan-European deals with a UK element
Impact on M&A Activity
Market participants and commentators expect that the general and political “what now” uncertainty will be reflected in the M&A markets. Most expect a continued downturn in M&A deal activity in the UK (particularly involving non-UK investors and buyers), at least until the shape of the arrangements (including the exact timetable and terms) for the UK’s exit from the EU has been established. The level and duration of any such downturn in M&A deal activity is, at this stage, no more than (educated) guesswork. It is easy to see how the prevailing uncertainty is likely to affect confidence, and for that lack of confidence to suppress deal appetite, resulting in a hiatus in M&A activity. Likewise, it is sensible to predict that potential buyers/investors (as well as sellers) will pause to understand the impact of Brexit on individual businesses or sectors before proceeding. For example, simply modelling a transaction in this time of economic, political and regulatory uncertainty has become a real challenge. Undoubtedly, there will be continuing activity in certain areas: distressed sales and domestic UK deals, particularly mid-market or below, being examples (with cross-border transactions being equally likely, at the opposite end of the spectrum, to be put on hold). For so long as this mood of uncertainty prevails (i.e. until there is either clarity on the terms of the UK’s departure or participants accept the “new normal”), it would be sensible to expect challenges from Paris, Frankfurt and elsewhere in the EU to London’s leading role in the European financial and financial services markets; and for international/global banks and corporates to be encouraged to review their historic London-centric focus within Europe..
Impact on Capital Markets
Most of UK (technically divided into three: English & Welsh, Scottish and Northern Irish) law relating to capital markets derives from EU law (principally the Prospectus, Transparency, Market Abuse and Takeovers Directives). It remains to be seen whether or not the UK seeks to maintain the current regime, although it would be sensible to anticipate that it would not make any material changes. The UK Government will be keen for the UK to remain an attractive listing destination. Balancing the “Leave” campaign’s desire to demonstrate sovereignty/self-governance, suggests that whilst there may be some amendments, these are likely to be in order to remove perceived EU “red tape”. One particular issue that will have to be addressed is the “passporting” of prospectuses: currently, a prospectus for an issuer which has