NEW YORK and LONDON, Sept. 18, 2018 /PRNewswire/ -- The global private equity (PE) market remains buoyant and seller valuation expectations remaining relatively high, yet buyout multiples continue to rise making capital deployment the most persistent challenge. In its new report published with Mergermarket – 2019 Global Private Equity Outlook – global law firm Dechert LLP predicts fund managers will gain competitive advantage by scaling up and using long-term capital or alternative strategies.
The majority of the 100 senior PE executives surveyed said they believe competition for deals will lead to an increase in consolidation between firms over the next three years. Such moves are expected to help PE firms expand their capital base and increase scale for other advantages. Markus Bolsinger, a partner in Dechert's New York and Munich offices, explains: "The goal is to maximize assets under management. There are synergies by having that all under one roof. You have a more sophisticated fundraising system, the back office is rationalized and expertise is shared. More assets under management also means you have more dry powder."
Stiff competition for assets is also incentivizing general partners to think more creatively about deal types and structures to help expand their pool of potential targets. According to the report, the most popular method is to create vertically integrated portfolio companies, as opposed to horizontal combinations, cited as likely (either very likely or somewhat likely) by 97% of respondents. This was followed by 95% who said they were likely to pursue acquisitions based on industry or market differentials. Meanwhile, 73% also said that partnering with strategic buyers was a likely consideration.
Overall, respondents said that private equity finds itself at an inflexion point. Uncertainty related to disruptions in global trade, repercussions from the U.S. tax code and regulatory overhaul, and an uncertain exit environment mean firms face unprecedented pressure to find long-term value. Looking into 2019, it is clear that the most successful firms will be ones most willing to adapt on the methods used to evaluate and engage on new opportunities.
"Capital used by private equity funds is becoming a lot more flexible. Not just in terms of how much is invested and the sectors at play, but also where in the capital structure the capital will be used and the expected return profiles," adds Ross Allardice, a partner in Dechert's London office. "For PE funds this is an exciting time as they now have a much wider variety of strategic options. From assuming minority interest to starting their own platforms, today's PE firms are no longer just asset management vehicles."
Key findings include:
- 88% of respondents said that having a specialization or niche had become important to their firm. 48% said this gave them a leg up in convincing companies to sell in their area of specialization.
- To combat competition and higher multiples, respondents said they were very likely to make acquisitions based on industry or market differentials; create vertically integrated portfolio companies; and build a portfolio company from scratch with a hand-picked management team.
- Respondents said the top challenges to executing club deals included determining the sources of financing (40%), finding the right consortium partners (36%), and building a rapport with consortium members (36%).
- Club deals, including transactions with significant co-investment commitments from limited partners, are becoming increasingly widespread, though challenges remain. Such challenges include determining the sources of financing and finding the right consortium partners.
About Dechert LLP
Dechert is a leading global law firm and an active advisor to the private equity industry. As a result of our longstanding roots and diverse client base of more than 200 private equity sponsors, we have a deep understanding of the latest market terms and trends, and provide creative solutions to the most complex issues in evaluating, structuring and negotiating private equity transactions on a global basis. Dechert's integrated global team of more than 250 private equity lawyers advises on a spectrum of funds, transactional and exit matters and has been recognized for its commercial judgment and client focus.
Mergermarket is a business development and market intelligence tool designed specifically for the M&A sector and provides proprietary intelligence and analysis on corporate strategy across the world. With around 200 M&A journalists talking directly to senior executives, dealmakers and other key players in over 60 locations globally, Mergermarket reports on the whole deal life cycle, from mapping out companies' early stage strategic intentions to tracking deals before they develop and providing real-time news on live events, thereby creating a large window of opportunity. Subscribers can also mine for trends, patterns and deal ideas using Mergermarket's comprehensive deals database and regular data-driven editorial analysis and commentary. Visit www.mergermarket.com to learn more.