The Deals Lens - What will bring home the bacon for private equity in 2015?
February 05, 2015
Private equity (PE) houses in Europe wrote fewer new cheques on their new deals compared to those they banked following exits in 2014. This might lead you to thinking it was a bad year for PE. On the contrary, improved trading and buoyant equity markets helped valuations and allowed many houses to exit from assets they’d held over a very challenging period.
2014 saw the welcome revival of the initial public offering (IPO) route to exit and also renewed activity in the corporate buyer market. Both were up hugely on 2013 in terms of the value they returned to PE vendors. In fact, with the double whammy of anaemic growth and a weak currency in Europe, plus the UK general election bringing discontinuity, 2014 looks in hindsight like a golden window for exits. So, if you got out last year, well done.
So what for PE in 2015?
With the IPO market losing air, there will be more assets on the market at lower valuations. The "IPO only" won't be the norm it was in 2014. We’re likely to enter a slightly perverse phase where PE new deal volumes will be up whilst the received market wisdom is that times are tougher. Couple this with huge quantities of dry powder (unspent piles of PE cash to you and me) and freely available debt and it could make for a heady mergers and acquisitions (M&A) market.
Such conditions are likely to drive up deal pricing, but not to the heady IPO pricing levels of 2014. To find value PE buyers might now veer towards super-cyclical assets that have been drifting in the doldrums for some time – automotive supply chain enterprises, or heavy engineering, for example – companies likely to see later cycle macro growth by the time an exit arrives in 3-4 years’ time. An element of stability and then adventure will also return to the financial services market; the Asset Quality Review (AQR) having some sanitising benefit and encouraging PE houses to look again at spin outs from the battered sector.
Non-core asset sales
Expect action too from global corporates selling non-core assets as they fine tune their portfolios for the next wave of economic growth which, for them, has a global slant. Consumer brands in particular are looking hard at their roster of products and are moving towards decisions about what they stick with and promote globally, and those products which they consider non-core and should be sold. A raft of familiar but currently unloved consumer brands in Western Europe are heading to market in 2015. They’ll get the attention of PE houses and headline writers alike.
Financial engineering won’t bring home the bacon
The last great cycle of PE was in the run up to 2008, when PE houses were seemingly able to make money by buying assets and then watching the values rise. Buying well, financial engineering and patience yielded great returns. Those days are gone, and they’re not coming back any time soon. 2015 will see assets available at seemingly attractive prices but, in the mid-term at least, financial engineering alone won’t bring home the bacon and could even be a recipe for losing the farm. Profit in this cycle will be hard won with the market favouring investors with strong strategic capabilities, able to work well with the incumbent management teams and importing the right skills at the right time.
What sector(s) will bring home your bacon in 2015 and beyond…and why? Share your thoughts below or schedule a meeting to discuss your investment strategy in confidence.
