Liquid private equity rose 39 per cent in 2013, as measured by the Red Rocks Capital Global Listed Private Equity Index (GLPE), outpacing major market indices and other alternative investments.
The GLPE Index is the largest, most widely followed private equity index, with more than USD500m in exchange-traded fund (ETF) tracking assets, and was the first investable US-based index to monitor global listed private equity companies.
GLPE puts an emphasis on direct private equity investing, overweighting direct investment vehicles and underweighting less direct investments such as business development companies and asset managers.
“It was a very good year for liquid private equity, and the outlook remains positive heading into 2014,” says Adam Goldman, managing director and co-founder of Red Rocks Capital. “Private equity is the largest alternative asset class on a global basis, with over USD3.3trn in assets under management, and increasingly advisors and their clients are looking for ways to allocate to this asset class. While institutions and accredited investors have used private equity for decades as part of portfolio allocation, it is now mainstream and available to average investors through mutual funds and ETFs.”
The past year was excellent for liquid private equity, characterised by strong returns across the asset class and a robust market for deal exits. Some trends that drove strong growth in 2013:
• A flood of IPOs: Managers took advantage of rising equity market values and an improving market for initial public offerings to sell off many assets at strong multiples to invested capital. This resulted in numerous private equity-backed IPOs in 2013, including Hilton Hotels, Seaworld, and Sprouts Farmers Markets.
• Exceptional performance for US private equity managers: Capitalising on an improved US economy, private equity managers set records both raising new funds and returning capital to shareholders. Management fees and carried interest earned resulted in rapid earnings growth for companies like The Blackstone Group, KKR & Co, and Apollo Global Management. All three of these firms were top five contributors to performance for the Red Rocks Global Listed Private Equity Index.
• Recovery in Europe: Stabilisation across the Eurozone, coupled with rising equity market values, resulted in strong performance for European Private Equity firms. The best performing European IPO of the year was the debut of luxury skiwear retailer Moncler backed by French private equity firm Eurazeo. Eurazeo and UK private equity management firm 3i Group were also top five performers in the Red Rocks GLPE index in 2013.
The outlook for private equity remains positive heading into 2014. Growth in existing private equity holdings could be driven by continued economic improvements in developed markets like the US and Europe, while dry powder will likely be deployed in select high-growth regions, market segments, and industries.
A few key investment themes going forward include:
• Increased mergers and acquisitions: A recent KPMG survey of more than 1,000 mergers and acquisitions professionals found that 63 per cent plan to be acquirers in the year ahead. The reasons for increased acquisition activity include an improved economy, less economic uncertainty, and pent-up demand, along with large cash reserves.
• Opportunities in Africa and other emerging markets: Many view sub-Saharan Africa as one of the most promising regional investment opportunities in the world, citing a rapidly growing middle class and favorable demographic trends. Africa-focused private equity funds are becoming more common as private equity managers look to focus on this high-growth region. With six of the world’s ten fastest growing economies, Africa provides a compelling market for private equity.
• Trends in the oil & gas industry: Private equity firms will continue their focus on the North American oil and gas sector, according to a recent Ernst & Young (EY) survey. A total of 77 per cent of survey respondents expect to see increased PE interest in North American oil and gas, while 49 per cent are currently active in the region. New PE investors will look to capitalize on the growth of unconventional resources in the US, specifically the burgeoning shale gas and oil industry. This sector has become so significant that many North American private equity firms are raising oil and gas specific funds, a rare phenomenon in the industry.
“The outlook for private equity continues to be positive, as investors have adapted quite well to the current state of affairs around the globe,” says Goldman. “This is no easy feat, but it is something private equity is good at over the long run.”
