Private equity deal volume likely to rise; investor power may wane
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Walker & Dunlop appoints managing director
      Digital Alpha raises more than $1 billion for infrastructure fund
      John Haggerty
      Sector’s risks need to be weighed, consultant says
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      Private equity’s health-care role draws spotlight
    • Philip Pearson
      Hymans Robertson chooses head of LGPS investment
      Daniel Celeghin
      Indefi hires New York-based managing partner
      Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
    • American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off’
      Michelle Dunstan
      Move to link exec pay to ESG integration growing
      The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
    • Pentegra joins with EPIC to offer 3(16) fiduciary services
      Interest rises in keeping retiree assets in-plan
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
      Pentegra launches pooled employer plan
    • Pension funds hear from beneficiaries on ESG – report
      Ivanhoe Cambridge sets 2040 net-zero carbon goal
      Church Commissioners set 25% emissions reduction target by 2025
      U.S. likely to join Europe in mandating climate risk disclosure – John Kerry
    • Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
      Riscura stories
      Dystopian tales explore altered retirement reality
      Joel Holsinger
      Ares wants to do good – and profit – with fund
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • Chinese stock risk up in first quarter, U.K. risk down – Qontigo research
      First Eagle starts small-cap equity team with liftout from Royce
      Sacramento County Employees rebalances equity, fixed-income portfolios
    • First Eagle starts small-cap equity team with liftout from Royce
       Kaitlin M. May
      Putnam Investments names head of global institutional management
      Paul Griffiths
      HSBC Asset Management selects next global head of institutional business
      Alex Bernhardt
      BNP Paribas AM picks global head of sustainability research
    • State pension plan funding advances in first quarter – Wilshire
      Sacramento County Employees rebalances equity, fixed-income portfolios
      CAAT pension plan scores 11.1% gain in 2020
      The headquarters of the California Public Employees' Retirement System, Sacramento
      CalPERS board votes to add long-term comp for CIO post
    • Walker & Dunlop appoints managing director
      First Eagle starts small-cap equity team with liftout from Royce
      Philip Pearson
      Hymans Robertson chooses head of LGPS investment
       Kaitlin M. May
      Putnam Investments names head of global institutional management
    • European private equity deal value, volume hit records for first quarter
      Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
    • BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
      Australia’s Centuria makes takeover bid for Primewest
      CalSTRS indutrial property
      Investors hungry for industrial properties
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Chicago Policemen on lookout for passive manager
      Iowa Public Employees seeks investment consultant
      New York State Common slates $400 million for renewable energy
      Texas County commits $100 million to another Taconic credit fund
    • Chicago Policemen on lookout for passive manager
      Iowa Public Employees seeks investment consultant
      New York State Common slates $400 million for renewable energy
      Texas County commits $100 million to another Taconic credit fund
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • High-yield spreads narrow, default rates drop
      Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • High-yield spreads narrow, default rates drop
      By the Numbers for April 2021
      Graphic: The state of DC plans
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. ALTERNATIVES
January 06, 2014 12:00 AM

Private equity deal volume likely to rise; investor power may wane

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Peter Cornelius is looking for an uptick in private equity fundraising and buyout activity.

    Private equity experts are split on whether prices paid for portfolio companies will continue to rise in 2014, leading to a potential bubble, or prices will drop as a consequence of rising interest rates and the resulting higher cost of capital.

    In the new year, some experts see an end to the negotiating power institutional investors have had over their general partners as more capital is committed to the alternative asset class in 2014.

    One school of thought predicts that rising interest rates will lead to an increase in transaction volume, which stalled in 2013 because plentiful cheap debt fueled ever-rising valuations for portfolio companies.

    Higher interest rates are likely to be a key event in 2014. Higher rates are expected to mean less real corporate cash flow, lower company valuations and more private equity-backed purchases, said Antoine Drean, founder of Paris-based private equity manager Triago and online private equity fund platform Palico.

    “It's quite remarkable how high the deal prices were, driven in part on how robust the financing markets were,” said Sanjay R. Mansukhani, senior manager research consultant in the New York office of Towers Watson Investment Services Inc.

    “Fund managers who had been chastised for the high leverage and high deal prices in the pre-2008 period were very reluctant to pull the trigger” and make investments in 2013, Mr. Mansukhani said.

    Private equity managers were reluctant to make investments because the high prices — based on high valuations — “didn't fit into their model for robust private equity returns,” he said.

    Mr. Drean echoed this sentiment. “In 2013, I was surprised by the relative discipline of private equity fund managers. Faced with a record $145 billion wall of expiring dry powder, (general partners) returned capital or sought investment period extensions rather than give into frothy prices for assets,” he said.

    Volume to increase

    The volume of private equity-backed mergers and acquisitions is expected to increase in 2014. In 2013, there were nearly 18,000 U.S.-based private equity-backed companies, up considerably from the nearly 10,000 in mid-2010, noted Jeff Golman, vice chairman of the investment banking group at Chicago-based Mesirow Financial Holdings Inc. “This bodes well for increased sale activity, as the PE firms will need to realize on many of these investments for the benefit of their limited partners.”

    Mesirow also expects increased private equity-backed sales because of the overhang of deals done in the 2007 industry heyday, Mr. Golman said. These deals include transactions such as Hilton Worldwide Holdings Inc., which Blackstone priced for an initial public offering on Dec. 10. Hilton's “values have increased substantially, which will facilitate some type of liquidity event whether an IPO or sale now that the values are close to or above what was paid for many of these companies,” Mr. Golman said.

    At the same time, some market participants say deal prices should go even higher in 2014 than they did in 2013.

    Edward Powers, managing director at Chicago based BAML Capital Access Funds Management LLC, a fund-of-funds manager and adviser, said one of the price drivers will be an increase in institutional investor commitment to private equity.

    “The combination of distributions received in 2013, increases in public market values and (investors') need for returns will drive up the amounts committed by institutional investors in 2014,” Mr. Powers said. More commitments added to “an improving economy and higher leverage levels in buyout deals will lead to higher purchase multiples on transactions,” he said.

    This will mean that 2014 will be a great time to be a seller but a year when buyers need to be choosy because they will be buying into a market on its way up, Mr. Powers said. “Over the past 12 months, we've seen the prices firms are willing to pay for companies steadily increase,” he said.

    Indeed, if the price keeps rising unabated, “it can potentially lead to a bubble building up in the (private equity) space, which can potentially play out negatively three or four years down the road,” Mr. Powers cautioned.

    At the same time, institutions might lose their negotiating edge.

    “After several years of having more negotiating power with funds and showing more discipline and getting better terms, institutional investors may see that power fade as distributions increase and capital flows more freely,” Mr. Powers said.

    More capital from existing and new investors will flow into private equity, he said. Investors will be attracted by “a combination of increased distributions in 2013, increases in public market values and need for returns. Investors will need to stay focused on shrinking the costs of their investments,” including making more co-investments, Mr. Powers said.

    Peter Cornelius, chief economist and strategist for New York-based AlpInvest Partners, Carlyle Group's fund-of-funds subsidiary, is cautiously optimistic that private equity fundraising as well as buyout transaction activity should both pick up in 2014.

    The growth should be encouraged by private equity returns that should provide a premium over the public equity markets. Also, the favorable global economic outlook should prompt further fundraising and buyouts, Mr. Cornelius said.

    Limited partners “currently seek to increase their exposure to private equity in an effort to rebalance their portfolios amid higher public valuations,” he said. “Given the outlook for monetary policy and the broader economy in key markets, including the larger emerging economies, I would expect this to continue in 2014.”

    But a number of wild cards could affect the growth, including uncertainty about the amount and speed of the tapering by the Federal Reserve in the U.S. And although the situation in Europe has clearly stabilized, “there is always potential for increased risk.” Mr. Cornelius said.

    Another wild card is elections in key emerging markets of Brazil, India and Indonesia, Mr. Cornelius said.

    However, economic growth that is not too robust and not too weak would be perfect for mezzanine debt financing, which Mr. Cornelius expects will return in 2014.

    “In the last couple of years, mezzanine has been very much on the back burner in the sense that there is little need for issuers to issue mezzanine debt because the capital markets are so liquid,” he said. “Going forward, however, investment opportunities look set to improve as the trough in bond yields is now probably behind us.”

    Buyouts recover

    Given that interest rates are likely to rise only gradually, the volume of buyouts should be able to continue to recover, he said. “This bodes well for mezzanine, which is a function of buyout activity,” Mr. Cornelius said.

    As a result, mezzanine will come back gradually over the next two or three years starting in 2014, he said.

    The year 2013 came with a few surprises for private equity investors. The hotly anticipated initial public offering market in China failed to materialize, Mr. Drean said. The Chinese government abruptly shut down the prospect of an IPO market in November 2012, closing an exit route for private equity investments.

    But that Chinese IPO market might launch in 2014. In December, China released guidelines, presaging the opening of the IPO market.

    Another surprise was how quickly debt terms returned to the looser standards, just five years after the 2008 financial crisis. “Attractive terms such as getting "covenant lite' (loans without the typical agreements protecting the lender), payment-in-kind loans, where the borrower can defer the interest payments — those are back, which surprised a lot of people,” Mr. Mansukhani said.

    It was a surprise “how short the memories are,” he said.

    Related Articles
    Hedge fund managers crossing their fingers for volatility
    Former FCC chairman joins Carlyle Group
    Hedge fund managers crossing their fingers for volatility
    Blackstone's AUM jumps 7.1% in Q4
    Deals might be hard to find for newly flush buyout funds
    Private equity and venture capital top 15% for yearly returns, trail public mar…
    Emerging markets private equity capital up 32% in 2013, Palico says
    Canadian PSP board CEO: private equity lags leveraged public equity investments
    Cambridge Associates: Dry powder 23% higher than expected
    Freeman: Money manager M&A deals trail first half of 2013
    Recommended for You
    Walker & Dunlop appoints managing director
    Digital Alpha raises more than $1 billion for infrastructure fund
    Digital Alpha raises more than $1 billion for infrastructure fund
    Sector’s risks need to be weighed, consultant says
    Sector’s risks need to be weighed, consultant says
    Innovations in DC: Helping Supercharge Retirement Outcomes
    Sponsored Content: Innovations in DC: Helping Supercharge Retirement Outcomes
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center