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In the last few years, the private equity market has undergone a lot of changes and seen significant transformations. According to a 2020 private equity report, around $1.3 trillion is still under asset management and private equity professionals are ready to grab investment opportunities as and when they come without wasting much time.
What does 2020 have for the private equity industry?
Private assets are becoming more essential
Private equity investments account for 2.3% of the world’s market capitalization. In fact, the number of private companies exceeds the number of public companies. As private equity offers long term value to capture long term risk premium. On the other hand, public listed companies have reported being loss-making. Nurbeger Berman reports one-third of public listed companies in the Russel 5000 are loss-making.
In the private market, investors have a deeper access to information, more direct and transparent governance control, and the opportunity to create strategic and operational improvements.
Additionally, private equity managers spend months sourcing and completing investments and have a lot of flexibility around entry and exit options.
Smaller funds are enjoying great success
As the private equity market is maturing, the industry is bifurcating into specialized funds and are experiencing success. While sector-specific funds are operated with efficiency to source deals and drive performance. Large asset management firms are using their scale and relationships to attract investment opportunities globally. All in all, big will continue to get bigger and specialized will continue to be more niche.
In the coming time, it will be easier to see private equity managers pick up on this trend to manage their funds more wisely.
Banks are diminishing and create opportunities for investors
Lately, regulatory changes and new technological solutions are forcing banks to withdraw from the lending economy. Initiatives like Open banking are giving opportunities to entrepreneurs and innovators to disrupt this space. This is an opportunity for institutional investors to step in where banks are withdrawing from lending markets and take advantage of higher volatility.
Deal volume may decrease
compared to last year, deal volumes may decrease this year, Lincoln International notes in its latest report. The firm notes that investors are looking to deploy capital in 2020. Recession-proof industry – healthcare, business services, technology – will attract capital, the report noted.
While investors are coming with a lot of cash and enthusiasm, the total volumes of the deal will fall down due to low valuation and political and economic worries.
Lincoln International notes the volume of deals may decrease as much as 50%.
Debt market will remain high
The demand for debt will stay strong. Despite slow global growth and increased volatility in the capital market, demand for debt will remain strong, Partner’s Group reports. For private equity managers and investors, this means a strong relationship with sponsors to source transactions and provide bespoke financing solutions at suitable risk-adjusted pricing will help.
In the last year, loan issuance has eased in 2019 and the private debt market is still borrower-friendly. To succeed in this area, underwriting and access to attractive transactions will remain the key.
