A Review of 2019

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2019 has been a tale of two stories for the private equity landscape. With an unprecedented $1.7 trillion USD in dry powder (unspent capital) in 2019, PE firms now have the task of deploying this capital. This conundrum has led to created trends in the industry including more niche investment strategies such as minority stake investments and raising long-hold funds.

With global PE firms all singing the same tune of 2020 US elections, US-China trade conflict, Brexit and China’s economic slowdown, most firms believe that the current geopolitical situation is of concern. However, one positive of this landmark equity market volatility is that deal opportunity for PE buyouts is at its highest. As valuations in public and private markets diverge, funds have identified arbitrage opportunities to drive deal activity.

With these high levels of dry powder, firms have seen three predominant trends emerge throughout 2019:-

  • Specialisation – Niche strategies have become more mainstream. In order to put unspent capital to work, firms have cornered smaller markets and have leveraged management skill to add value. 
  • Carve outs – Expectation for carve outs are at their highest, with the sell-off of business units needed to pay down debt. This follows a prolonged era of low-cost debt that has fuelled buyouts. Firms will now look to deleverage and reduce liabilities off their balance sheet.
  • Downward pressures on fees – PE investors are either urging firms to put their capital to work quickly or demanding lower fees. They are also angling for more direct co-investment in order to juice their profit shares and hold greater control over portfolios. Some of them are even purchasing equity stakes in the PE houses as a long-term play – creating “funds of firms”. 

Elevated competition for deals over the last three to four years has pushed pricing multiples to an ever higher 11.5x. As a result, finding acceptable assets with correct price tags has become harder. However, the unprecedented value of the public equity markets has allowed for these pricier assets to still be preferable in the face of unparalleled market volatility.

As a result of this elevated competition in the private markets, minority stake investment with quicker exits has begun to rear its head. Firms are following the mantra of “taking smaller slices of more pies”, by spreading risk across a less competitive pool of assets to keep pace with overpriced valuations. Firms are looking for quicker exit times with the median deal cycle reducing to 4.5 years.

Overall for Berkeley Assets, our deal cycle has remained consistent with greater emphasis on initial asset selection to identify undervalued opportunities; while remaining in a blend of shorter 12-24 months and medium 5-7-year deal cycles.