Last updated: 00:41 / Thursday, 11 January 2018
According to Pavilion

What Would 2018 Look Like for Private Equity Investors?

What Would 2018 Look Like for Private Equity Investors?

2018 is expected to have an increase in global growth and, according to William Charlton, Managing Director at Pavilion Alternatives Group, most institutional investors are maintaining or increasing their allocations to private equity.

While growing economies generally would be beneficial to most private equity fund managers, with the possible exception of distressed managers, Charlton believes that 2018 is shaping up to be a year of challenges as well as opportunities. “The capital deployment issue is one of the known knowns, but as Donald Rumsfeld has argued, the bigger risk may well be from the unknown unknowns.” He states.

In his opinion, the biggest challenge facing the U.S. venture capital market is the IPO environment.  “While the IPO market showed some signs of recovery in early 2017, several IPOs were not well received and it remains very difficult to successfully navigate the intricacies of taking a company public.” On a more positive note, he expects the repatriation of large amounts of capital currently held by public companies in off-shore accounts due to the tax reform, a situation he considers could impact positively on an already robust acquisition market.

Meanwhile, in Europe, fundraising activity has increased recently while both deal flow and exits have been declining in the European buyout market, and EBITDA multiples “are up significantly over recent years and are approaching the lofty levels already seen in the United States. If prices remain high and expected economic growth remains bounded, European fund managers will be challenged in 2018 to generate historically attractive private equity returns commensurate with their risk profiles.  Furthermore, the uncertainty induced by Brexit adds to the complexity of accurately assessing risk-return exposures across the region.”

In contrast to the mixed measures for both the U.S. and European markets, deal flow, exits, and fundraising are up in Asia-Pacific private equity markets. Given the region’s export-dependent nature, Charlton believes investors focused on it will face the continued challenge of investing in companies that can be successful even in the event of a decrease in global demand.

Regarding oil and considering its prices have enjoyed a steady recovery puting them at a level Charlton believes are attractive investment opportunities, he believes a challenge “is identifying quality private equity fund managers that can consistently generate attractive returns when the underlying value of their assets are highly dependent on a decidedly volatile commodity.” In infrastructure, he believes the biggest challenge will be identifying assets that have the potential to generate attractive returns despite the higher entry prices.

Private credit markets have seen rapid growth in recent years as many institutional investors seek a broader opportunity set to increase returns in their fixed income portfolios.  Consequently, private credit is enjoying a strong fundraising market.  However, it appears that some fundamentals in private credit markets may be weakening. The increased interest in private credit has led to a decrease in spreads as well as an increase in covenant-lite deals. “If the recent economic recovery does not sustain, we could be seeing the initial phases of a perfect storm in global credit markets.  If so, distressed fund managers may be well-positioned to take advantage of current overly lenient terms. The challenge in credit markets for 2018 will be finding fund managers that are able to issue loans with terms that provide some protection in the event of an economic decline.” He concludes.