Adveq, an investment manager of private equity funds of funds, believes that investors are facing the prospect of a tripolar private equity investment world in which the three major private equity regions – the US, Europe and Asia – will operate on the basis of their own rules.
In addition, and as a consequence of the economic crisis, valuations, refinancing arrangements and exit markets will present the most significant challenges for the sector in the future.
Adveq forecasts that private equity markets of the future will have to operate in a tripolar world. While the concept of private equity originated in the US and spread in the 1980s via Europe and Asia to become a global phenomenon, today’s investors face different private equity worlds, each characterised by different conditions and following their own dynamics.
Asia’s salient characteristic is strong growth, accelerated in China by means of enormous stimulus packages for the economy and supported in India by the country’s burgeoning middle class. Over 100 quality fund managers are looking to benefit from investment opportunities in the Asian Pacific region.
Opportunities in Europe are largely dependent on European integration. The sale of business subsidiaries or sections is expected to drive smaller and medium-sized transactions. The universe in which distressed and turnaround managers operate is still in its infancy and investors need to be highly selective.
In the US, distressed companies and the technology sector are offering particularly attractive opportunities. In the former, bankruptcies and defaults are presenting distressed and turnaround managers with promising transaction opportunities. In the latter, the currently low inflow of funds in venture capital is leading to the financing of high-quality innovations only.
According to Adveq, private equity is going through another major cycle. In the old world, fund managers are finding their universe shrinking, while investors have new opportunities for secondary transactions, but each global region now needs to be considered separately on the basis of its own specific conditions.
The effects of the world economic crisis on the private equity sector are becoming more and more evident. Valuations, refinancing arrangements and exit markets are the most significant challenges for the future:
• Both short and long-term comparative analyses show that private equity is outperforming public equity markets.
• A number of studies show that institutional investors are still very satisfied with their private equity programmes, even after the crisis. Those investors who have not yet reached their target allocation are planning to allocate more funds to the asset class.
• Many private equity fund managers took the boom years between 2005 and 2007 as an opportunity to clean up their portfolios, successfully selling off most of their earlier transactions and writing off a few.
• As most of the borrowed capital used for buyouts in the boom years is due for refinancing between 2013 and 2014, the companies concerned have yet to face their biggest hurdle.
• Both sales by companies and difficulties with refinancing are going to present good entry opportunities on attractive terms over the years to come.
Adveq’s managing director Peter Laib (pictured) says: “As a whole, institutional investors are very satisfied with their private equity programmes. There is evidence of a short and long-term outperformance over equity markets and private equity also has stabilising effect on the overall portfolio.”
Adveq’s chief executive Bruno Raschle adds: “The effects of the economic crisis are generating many attractive opportunities for high-quality fund managers, but investors have to be aware that the dynamics of the private equity markets are now determined by a tripolar world. Each region is subject to its own conditions and must therefore be analysed separately. This is the key to successful private equity investment in the future.”
