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February 28, 2020

SuperReturn: A good time for the industry to reflect on its evolution

Simon Tilley from investment bank Stephens highlights some of the key talking points at SuperReturn

By Simon Tilley, Managing Director, Stephens Europe

Private equity has evolved significantly over recent years, moving away from being dubbed ‘alternative’ to far more mainstream for many investors.

Considerable changes to the space, particularly in Europe, have emerged in parallel to the intensified institutionalisation of the private equity sector following the global financial crisis more than a decade ago. These changes have been among the major discussion points at SuperReturn this week.

One of the most significant changes to the space is the proliferation of different structures and offerings – such as fund of funds, buyout funds, flagship funds, long-term funds, infrastructure funds, minority funds, co-investment funds, and a whole host of other specialised funds – from an increasing number of players.

In conjunction with a sharp growth in secondary market liquidity, these offerings serve as a means to ensure the industry remains flexible and accessible to a broader range of investors than ever before. Increased allocations coming into the space demonstrate the success of this approach.

It is easy to see why there has been such a supply of capital at a time of increased ease of access – as the value of private equity assets has grown twice as fast as equities since 2002. As the industry continues to mature and performance remains strong, allocations are unlikely to slow over the near term – especially considering private equity is still a small element of most investor portfolios.

However, it is important for the private equity industry to consider the key factors that have driven its success over the last several decades, as well as what it contributes, and likely to further contribute, to the broader global economy.

Indeed, this is an opportune moment to reflect on the creativity the private equity industry is renowned for. The breadth of funding options now offered by private equity and, increasingly, private debt funds, means small, medium and large businesses operating across a diverse range of sectors can access private capital to fuel growth – without having to consider listing as sub-scale businesses, on often fickle public exchanges, where a strong investor following and access to further liquidity to fund growth is far from assured.

However, the sheer scale of some of the leading players in the industry has started to blur the lines of how returns are made. Private equity expects management teams of investee companies to have ‘skin in the game’ to ensure alignment of interests. When it works, as so often it does, the returns on a successful exit can be impressive. But for the listed behemoths of the sector, so are the fees earned on the assets under management – arguably more so than the impact of a single successful, or unsuccessful, investment.

Another key development in the private equity space in recent years, which has been another of the talking points at SuperReturn, is the attractiveness of European transactions for US private equity participants.

While there were just 602 completed transactions for US private equity firms in Europe in 2019 – below the average of 691 over the previous five calendar years – we view this as an understandable reaction to the uncertainty surrounding Brexit negotiations and slowing economic growth in key European economies, such as the export powerhouse Germany.

However, with US private equity buyout multiples at elevated levels relative to Europe, US middle-market private equity firms will continue to look to Europe for appealing opportunities in 2020 – both to acquire new portfolio companies and to grow the international reach of current investments. Indeed, as part of Stephens’s dialogue with US sponsors, there is a discernible sense sponsors are looking to develop a presence in the region as a positive first step on the journey to internationalisation.

Conversely, more and more European mid-market private equity firms are also establishing offices in the US to support existing portfolio businesses and make platform investments. This is particularly the case in sectors such as financial services, aerospace and defence, industrials, software and tech services.

It is this nurturing of growing middle-market national champions into international players of scale the private equity industry does so well. For financial services firms, being able to offer comprehensive trans-Atlantic advice will, therefore, prove pivotal to success in the industry going forward.

The contribution of the private equity industry to the vibrant, modern, international, digital economy we operate in today has been huge. However, in order to assure the private equity industry’s continued success, it is important we all reflect on how to address the challenges, and embrace the opportunities, of the move from an alternative to a mainstream asset class for a growing cohort of investors.

Simon Tilley is managing director at investment bank Stephens Europe and leads the European financial sponsors group. 

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