Continued geopolitical and economic uncertainty prompted private equity investors into taking a disciplined approach to their investment and fundraising decisions in 2019, but firms did exploit the opportunities at the top of the market. In the second of a two-part series, S&P Global Market Intelligence looks at five themes that have affected strategy over the past year.

Uncertainty

Uncertainty was a key theme this year amid unpredictable political events and a looming market correction.

"Cautious" describes HarbourVest Partners LLC's discussions around opportunities this year, Carolina Espinal, managing director at the firm said. There has been heightened sensitivity around pricing, and managers have sought out businesses where they "really understand what the value creation opportunities are for that investment," she said.

Likewise, Hamilton Lane Inc. reports a year of uncertainty around geopolitical factors, its principal Carolin Blank said, but she added that from what the firm sees, the industry has dealt with it reasonably well. "We have seen industry participants really getting ready for whatever outcomes there might be. The best have done their contingency planning, they have done their homework really, in order to stay fully functional from a regulatory and a fund marketing perspective."

Brexit

No further clarity emerged as to the U.K.'s future relationship with the European Union.

Brexit uncertainty has loomed over U.K.-focused investors for over three years. Hope for certainty around the process was once again pushed back after Prime Minister Boris Johnson called a general election for Dec. 12. His Conservative Party won a substantial majority in that election, paving the way for him to pass his previously deadlocked Brexit deal through parliament in January.

Graphite Capital Management LLP raised its latest buyout vehicle in 2018 and began deploying this year. "A number of our European investors have said their investment committees have turned more negative vis-à-vis U.K. funds during this year," Graphite Managing Partner Markus Golser said. "I think the implication was that we were fortunate to raise a fund last year, not this year." The Brexit delay has pushed back hiring decisions for U.K. corporates, and the volatility of sterling made it harder to forecast for importing and exporting businesses, he added.

One fund of fund manager said Brexit has affected its portfolio, but its exposure is limited in its global portfolio, and for that, it is grateful. Likewise, HarbourVest has been "cautious" with regards to the funds it backs and is seeking out U.K. managers that have experience investing in assets that are sheltered from political issues and that may take a more international approach, Espinal said.

But there have been some unexpected positives for U.K.-focused managers who have turned to overseas growth in recent years. "[U.K.-focused businesses] have had to focus on [overseas expansion] more, they've invested in it, and it's borne fruit. You could sort of say, perhaps a slightly unintended consequence, but it's definitely positive — a positive side effect of an otherwise really quite depressing story," Golser said.

U.S. bill aiming to 'fundamentally reform' PE

Private equity was placed under the spotlight in July when Democratic presidential candidate and longtime consumer advocate, Massachusetts Senator Elizabeth Warren, introduced the "Stop Wall Street Looting Act" bill, which aims to "fundamentally reform" the private equity industry.

In November, private equity firms were invited to answer questions at a hearing held by the U.S. House Committee on Financial Services regarding the bill but declined to send representatives, committee Chair Maxine Waters, D-Calif., said. Drew Maloney, president and CEO of private equity lobbying group The American Investment Council, testified on behalf of the industry.

A number in the industry agree that it is necessary to publicly discuss private equity's value. "There's certainly a heightened understanding of the asset class and how returns have been generated, and I would say the onus is on the industry to make sure the messaging around value creation, job creation, the positive and kind of the benefits of the asset class," HarbourVest's Espinal said. The private equity industry will continue to grow, and with it, its oversight, she added.

Big deals and complexity

Mega deals, high valuations and competition for assets continued in 2019.

Typically, large companies tend to navigate choppy economic conditions better than smaller companies, Morrison & Foerster LLP leveraged finance Partner Chris Kandel said, which may be driving larger deals. There's also large amounts of dry powder, so more money can be put to work doing larger deals.

Both larger and middle-market deals have become more complex, and there has been an uptick in the number of deals like public to private and corporate carve-outs, as general partners look to pay more reasonable prices, HarbourVest's Espinal said. There is also perhaps a willingness to tackle some complexity to get better pricing, she added.

Take privates are more attractive because there is a short supply of private companies for sale, Kandel said, adding that sentiment suggests that some types of businesses do better under private ownership without the focus on quarterly earnings in the public market.

ESG and sustainability

The importance of environmental, social and governance factors has grown.

Europe is leading the way when it comes to the adoption, and "the thoughtfulness around adopting" ESG, HarbourVest's Espinal said, while there is awareness with mixed adoption rates in the U.S. and Asia. But globally, she believes there is a heightened awareness to consider sustainability and environmental considerations, and there is awareness that good ESG principles do not necessarily have to sacrifice returns.

ESG and sustainability can also create a competitive edge for private equity funds, Scott Church, co-founder of placement agent Rede Partners LLP, said. "We are seeing a sea change starting in Europe now also in the U.S. with that," he added. In terms of geographic differences, U.S. managers have more of a focus on the social point of ESG, with diversity and inclusion a focus point for firms, compared with Europe's focus on environmental factors. "Hopefully we've got the G right just by being in private equity, but I find that's a major difference," Church said.