Private equity market participants are cautiously optimistic that deal volume and fundraising will continue at a similar pace to previous years in 2020, despite global headwinds and the ongoing threat of a downturn.
It's a case of "more of the same" going into 2020, with low interest rates, readily available equity and large fund sizes, but private equity managers are "looking over their shoulder," one senior private equity adviser said, on condition of anonymity. "I think everyone knows winter is coming, everyone knows that we're long in the cycle," the adviser said.
Hamilton Lane believes the likelihood of a recession in the next 12 to 18 months is higher than it considered previously, principal Carolin Blank said in an interview, and is monitoring developments in the industry "very closely." But others in the industry have called time on predicting when the cycle will turn. "I've given up," said another adviser, "I predicted it in 2017." In the meantime, the industry is making the most of the midnight sun.
Private equity funds raised in excess of $500 billion for the fourth consecutive year in 2019, and at $595 billion, the total raised was the third-highest total on record, according to data provider Preqin. Fundraising is predicted to remain in line with previous years in 2020 as managers deploy capital and return to market or introduce new strategies to exploit favorable conditions. Managers expect that they will be able to raise "significant capital, certainly in the first half of the year," HarbourVest managing director Carolina Espinal said.
Some private equity firms have been returning to market quickly to raise successor funds while market conditions are favorable, a trend that will continue into 2020. "If you leave it too long, is there a risk that the market turns and you sort of missed your boat?" the anonymous senior adviser said, adding that fundraising will level off as managers look to deploy the cash they have raised. "You can't spend it that quickly," they said.
On the deals side, private equity-backed buyouts numbered 5,103 in 2019 and had an aggregate value of $393 billion, according to Preqin, while dry powder stood at $1.43 trillion at year-end, a record high. Global dealmaking is expected to remain in line with last year in 2020 as the asset class continues to deploy record levels of dry powder despite ongoing geopolitical unpredictability, such as the U.S. election and ongoing impeachment trial, Brexit, and the U.S.-China trade war, to name just a few.
But uncertainty cannot be completely ignored, and most will continue to approach investments with caution. "There's pressure to deploy capital — there's tonnes of capital out there," Tom Whelan, private equity partner at McDermott Will & Emery said, "it's finding the right home at the right price."
Large deals will remain a feature of the market in 2020 as managers look for ways to spend capital in less competitive processes. Larger, more established businesses are also considered safe targets in the event of a downturn.
Many large deals announced in 2019 were public to private transactions, and these are expected to be more commonplace in 2020. "I'm surprised private equity doesn't do more public to privates," Whelan said but added that they are a double-edged sword for managers. Bids on public companies launch private equity firms into the spotlight, something they do not typically seek out over fears of negative publicity. But it is rare that take private bids are contested, and if firms have offered the right price and have good PR they may be able to pay a better price than they would in a private auction, Whelan said.
Public to private deals are not the reserve of mega players. Another private equity adviser, who also spoke on condition of anonymity, has seen take privates across the spectrum, including relatively small companies that have languished on the public markets. The industry has longed to do take privates, they said, and there are a lot of good assets that players feel they can do a lot with. "It's just been very difficult to get it away, but public company shareholders seem more willing to sell," the adviser said.
Buy and build, a long-term private equity strategy, will remain not just a trend in 2020 but among some selling management teams, an expectation. "If you take it back 15 years ago, buy and build was a particular strategy of particular funds. Now everything's buy and build and people almost don't even call it that anymore," the adviser said. It's now a fundamental part of the "deal romance" as firms pitch to selling managers the acquisitions they can fund and help them with, and how they will help them grow beyond that. The industry has become more sophisticated when it comes to business integration, "which is never easy," while the strategy allows funds to deploy larger amounts of capital to grow businesses.