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The Private Equity Trends From 2018 Worth Keeping An Eye On

Record levels of new funds have been raised across Private Equity and Private Debt, driving strong deal volumes and pushing up values across the UK, helping it remain Europe’s largest private equity market. The year has shown that the asset class has enormous appeal among investors.

As we enter 2019, it is worth looking back at a number of key trends with the asset class have come to the fore over the past 12 months. Here are the trends from 2018 worth keeping an eye on and how they are likely to impact dealmaking in 2019.

  1. Record fundraising levels for private equity

2018 has seen healthy levels of private equity fundraising thanks to strong investor appetite, continuing the year-on-year increases in levels of cash reserves since 2012. This investor appetite has been maintained by sector-focused private equity funds consistently outperforming mainstream funds, in part due to the development of creative deal structures and the emergence of new private equity models. Going into 2019, the private equity market is saturated with record levels of funds and highly liquid ‘dry powder’ securities. Private equity funds will look forward to being amply resourced in the coming year, and it is likely that mergers and acquisitions will continue to be in demand. 

Investors are also broadening the scope of their portfolios to alternative asset classes such as hedge funds, real estate and commodities, and have moved towards prioritising outcomes and performance over absolute returns. Investors recognise the value of a diverse portfolio of assets which are illiquid enough to insulate their value from sentiment-driven market variations, and as such are being drawn towards alternative asset classes. This trend is likely to continue into 2019 as geopolitics remains the primary driver of global market fluctuations.

  1. The Proliferation of the debt fund

There has been a clear proliferation of debt funds compared to several years ago. Indeed, the sector has seen threefold growth globally since 2007. Debt funds are increasingly being recognised by investors as reliable, relatively low-risk elements of investment portfolios which allow diversification into higher-return sectors. The flexibility available to debt funds when it comes to lending makes them attractive to companies prepared for that increased flexibility, especially compared to traditional lenders like banks and commercial mortgage-backed securities.

Scott McClurg
HSBC's Scott McClurg

Debt funds can provide a bridge for valuation gaps, which account for around half of all failed processes and can represent a difference between perceived and market value of up to 20%. Access to a robust debt capital market has allowed purchasers to keep up with rising company valuations we have seen over the last few years. In the present founder-friendly mergers and acquisitions environment, debt funds will likely remain a valuable facilitator of deals which might otherwise fall at the hurdle of a valuation gap.

  1. Growth of data analytics

In 2018, the use of data analytics gathered momentum in the deals market. Private Equity funds are increasingly looking to data analytics to better understand trends in markets and conduct more accurate due diligence, increase performance, improve benchmarking, and helping them to focus the deployment of capital they are sitting on more efficiently, and successfully. Sophisticated data analytics is changing the landscape on a number of business sectors across the UK and the world, and with data being so prevalent in banking it is proving a number of opportunities to apply a deeper analytics approach. The industry is in broad agreement that data analytics and artificial intelligence are necessary and will be more heavily used in 2019 and beyond.

  1. The boom of the buy-and-build

The buy and build investment model isn’t new. But private equity groups are increasing the number of investments in smaller companies to bolt together into larger business empires. Essentially, they have the ability to speed up growth and improve returns, particularly if the economy is slow. Globally they have risen from representing 28 per cent of total deals in 2004 to nearly half of all transactions during the first half of 2018.

As the market booms, private equity groups are facing stronger competition from each other, as well as wealthy corporations and wealth funds. The appeal of buy and build comes as private equity groups can boost sales and access larger pots to expand by merging small companies.

Buy and build models will remain popular into 2019 as the rewards for the strategy can be significant – for both vendors and acquirers. I expect appetite for buy and build activity to remain high, with large corporations expected to continue to target smaller ones as a means to add revenue streams and grow market share.

Private equity had its strongest year to date in 2018 and enthusiasm for private equity is as high as it has ever been. Technology has clearly been a key element of this growth and the aforementioned trends are all likely to play pivotal roles in the year ahead.

Scott McClurg is Head of Leverage Finance at HSBC

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