Private equity in 2012 made a rapid recovery from the lows of the economic downturn, but firms might suffer a setback in 2013 amid the expected return of high valuations and easy credit, industry insiders say.
“Uncertainty has been the issue this year and will continue until everybody has a better sense of the politics going forward,” said Brad Morrow, senior private markets consultant in the New York office of consulting firm Towers Watson & Co.
In 2012, values rose to amazing heights, pushed up by lenders eager to get back into the game.
“As we look toward the future, valuations have gotten high, in large part driven by the availability of credit,” said Jessica Reed Saouaf, managing director and co-head of private equity at San Francisco-based Hall Capital Partners LLC, which provides outsourced CIO services to institutional investors. “(Valuations) reached levels I didn't personally think I would see so soon after the crisis.”
Ms. Reed Saouaf added that while it's possible high valuations will continue into 2013, it is likely worldwide macroeconomic issues and political uncertainty will temper the private equity industry's access to debt. “That would pull the industry back a little, which would be positive,” she said.
At the same time, private equity managers are sitting on a big supply of mature investments. They will be proactive in trying to sell portfolio companies or take them public, Ms. Reed Saouaf said.
Private equity managers had a combined $2 trillion in unrealized portfolio value at year-end 2011, the latest data available, up from $1.8 trillion on Dec. 31, 2010, according to London-based alternative investment research firm Preqin.
However, it is likely to be harder to generate exits in 2013 because of macroeconomic problems, Ms. Reed Saouaf said.
Managers in industries dependent on the federal government, such as the military and health care, will have added challenges, Mr. Morrow said, because of worldwide political and economic uncertainty.
“It will make it difficult to understand where the business is going or its value,” he said. “It makes it difficult to plan, such as for expansion, for hiring. A lot of it is a waiting game.”
This difficulty could add a year to a private equity firm's exit or growth plans for their portfolio companies. If private equity firms have to add a year to their plans, that could lower returns, Mr. Morrow said.