EY: Private Equity Has Largely Recovered, but it’s Not All Smooth Sailing

For Five Years, the Private Equity Industry Has Largely Recovered From the Financial Crisis. But it’s not all Smooth Sailing as GP’s Navigate Their Path Through the New Year.

Private equity (PE) firms are entering 2014 with increasing confidence. In our latest PE Capital Confidence Barometer (PE CCB), the proportion of general partners (GPs) who responded that the global economy is improving reached 66% — a two-year high. This is a significant shift from a year ago, when it registered just 23% of GPs.

This optimism is certainly justified: the last year has seen some remarkable successes for the industry, with the exit market buoyed by a strong appetite for IPOs in the public markets. By the end of the third quarter of last year, PE-backed IPO value was 77% higher than the same period in 2012, according to EY’s Private equity, public exits report for Q3 2013. PE-backed IPOs raised 36% of global IPO proceeds.

The Americas comprised the lion’s share of these IPOs, with US$11.5b raised across 56 deals in the first three quarters of 2013 — up 60% on the same period in 2012. There is, across the globe, a robust pipeline of IPOs in waiting: 70 companies registered for IPOs in the first three quarters of 2013. Considering the strong aftermarket performance of these IPOs (an 18.1% rise through to the end of September 2013), the stage is set for a continued flow of high-quality PE backed companies to go public. The sustained IPO activity is welcome, given the exit overhang that weighs on PE.

Acquisition activity has remained steady with a pick-up in larger transactions. In the first three quarters of 2013, the aggregate value of global PE buyouts was 19% higher, according to figures from research group Preqin, than in the same period of 2012. One driver of this activity has been the increasing availability of low cost debt to fund transactions. In our latest PE CCB, 90% of respondents said that credit availability was stable or increasing — up from only half of respondents the previous year.

In addition, the fund-raising environment has continued to improve: two-thirds of our PE CCB respondents say that they are optimistic about the current environment for raising capital, up from 41% last October. There is a steady stream of new investors into the asset class, attracted by PE’s outperformance compared with returns from public markets.

And existing PE investors continue to be supportive of the industry — Preqin figures suggest that nearly 60% of limited partners sought to maintain their PE exposure in 2013, while an additional 27% were looking to increase it. There is little reason to suggest the trend will be different in 2014. Many firms remain realistic about their ability to raise capital: 71% say they are seeking to raise funds of the same size or smaller than predecessor funds.

The challenge for the industry in 2014, then, is to find new exit and acquisition opportunities by casting the net wider into both existing and new markets. On the deal front, we see signs of PE expanding into new frontier markets, such as Colombia, Mexico and Turkey. On the exit side, portfolios average holding periods’ are extending despite the success experienced in 2013. The expectation is that the exit market will continue to provide an opportunity for GP’s to liquidate portfolio companies. Acquisition levels will likely increase, although pricing altitude and a relatively light buyout pipeline are obstacles to a dramatic uptick in activity.