Focus on mid-market will continue
Mid-market has always been the apple of the eye for the private equity firms. The coming year will continue to see a focus on mid-market in the U.S and Europe. Sunaina Sinha, Managing Partner, Cebile Capital, suggests, mid-market is where private equity firms can still buy at sensible acquisition multiples and add value to the company and deliver strong returns.
Similarly, thematic funds or sector-focused funds will be able to generate better deals and ensure strategic exits.
Technological disruption will continue
Undoubtedly technology has brought massive transformation across the industry. It has had similar effect in the way private equity firms see portfolio companies. According to Philippe Poletti, CEO, Ardian France, the coming year will have opportunities for companies from all sectors as business models face transformational change due to technological advancement.
It will be essential for private equity firms to react quickly to this change and capture market share to become more competitive in the current market.
Poletti, further adds, digitalization is major focus for all our portfolio companies and forms a key element of the investment case. The firm is exploring its potential in deal origination, investor relations, and reporting.
Global fall in fund raising
Last year, firms raised a record-hitting sum of funds. In fact, three firms – Blackstone, Vista, Thoma Bravo, raised an insanely large sum of fund. Expectedly, in the coming year, the firms are aligned to deploy the capital, but global fundraising might fall in 2020 compared to 2019’s. Dylan Cox, a Lead Private Equity Analyst, Pitchbook, says currently there is no fund in the larger market bigger than $10 bn. Europe being an exception where fundraising still has some leg and top private equity firms continue to raise funds. Three funds in the region have raised mega funds (5bn Euros).
Increase in deal flow
In 2020, deal flow is expected to increase. Brexit has had a negative impact on deal-making and created a deal vacuum. Due to Brexit, there was an overall compression in a deal vacuum. The deal volume decreased as much as 45% in mid-market, Lewis Bantin, Partner, ECI Partners.
Firms invested in their companies to transform them into a post-Brexit model. One of the ways firms did so is by de-risking their supply chain. Firms have been patient all this time to assess the cost base and review margin profile. As this constricted demand is released, private equity firms will be able to see their investments come to fruition.
GPs will benefit
Limited partners are streamlining their investment portfolio in GPs and increasingly focused on building strategic relationships in concentrated asset classes In this scenario, GPs with diversified asset classes will benefit from the growing trend. Thus, private equity firms should be ready to capitalize on this trend. Private equity professionals should be ready to turn this trend in their favor.
All in all, private equity shows good signs of progress but as the capital market has always been difficult to predict, we can only hope.