Growing concerns about the state of politics in major markets as well as fears over a potential recession are the biggest challenges currently facing the private equity (PE) industry, according to Global Private Equity Outlook 2020, published by global law firm Dechert in association with Mergermarket.
The survey indicates that formerly niche strategies are becoming commonplace as the industry adapts to an overabundance of capital, with buyout practitioners moving into growth capital and minority stake investing as well as raising long-hold funds in order to deploy investor funds.
In North America, deal activity has grown so far in 2019, it raises the question of how long activity can continue to increase in PE’s biggest, most dynamic market, and what could possibly derail it? For 40 per cent of our respondents, the 2020 presidential and congressional elections are the developments most likely to impact dealmaking in the near future.
New York-based Dechert PE partner, Markus Bolsinger, says: “Faced with geopolitical and macroeconomic headwinds, the short-term outlook for private equity is less rosy compared to this time last year, however private equity as an asset class will continue its successful march. The best performing private equity managers, whether through creative deal sourcing, strategic partnering, or innovative monetisation of their investments, will raise ever larger pools of capital and diversify into additional asset classes.”
In the EMEA region, buyout activity has remained robust despite the looming prospect of Brexit and the unknown consequences of the UK’s departure from the EU. Looking ahead, Brexit remains the biggest potential barrier to investment for PE firms in EMEA over the coming 12-18 months, as cited by 57 per cent of respondents investing in the region.
London-based Dechert PE partner, Ross Allardice, says: “While the past decade has seen substantial dry powder being built up by sponsors, high valuations mean it remains a struggle to put that money to work effectively and requires a more creative approach by sponsors to investing money. As such, traditional PE funds are moving into growth capital, minority stake investing and raising long hold firms to differentiate themselves.”
In Asia-Pacific, Chinese PE activity is likely to remain subdued possibly until the country reaches a trade accord with the US China’s loss is, in part, benefiting other countries in Asia – in particular, Vietnam has made meaningful gains, opening its borders to foreign investors and establishing itself as a regional manufacturing hub.
Singapore-based Dechert PE partner, Siew Kam Boon. says: “The slowdown in the Chinese economy continues to have a dampening effect on its neighbors, particularly those which heavily rely on trade with China. Coupled with the drop in the level of Chinese investment and acquisition appetite in the region, valuation expectations in parts of Asia Pacific are starting to fall. For certain funds and their portfolio companies, this could present unique opportunities, particularly if the target company possesses strong fundamentals.”
