Despite the credit crunch hitting Private Equity investment companies hard, the sector has had a good 2013 so far, with markets having rallied and discounts in the sector narrowing to reflect this. Data from the Association of Investment Companies (AIC) demonstrates that the average private equity investment company’s share price is up 25% on average over one year, and 72% over three years, outperforming the average investment company by 9 percentage points and 39 percentage points respectively. What is the outlook for private equity investment companies?
The AIC today hosted a press roundtable lunch on the sector with Andrew Lebus, Manager of Pantheon International Participations and Tim Syder, Manager of Electra Private Equity. Their views have been collated along with those of Alex Barr, Manager of Aberdeen Private Equity and Urs Wietlisbach, Manager of Princess Private Equity.
Discounts in the sector narrowest since pre-credit crunch
2013 has seen the narrowest discounts in the private equity sector since before the credit crunch in 2008. The average private equity discount reached the narrowest average level of -13.8% at the end of February 2013, and the average discount is -18.4% at the end of June 2013. Four years previously, in February 2009, the average sector discount reached its widest level of -61%.
Discount levels of the average private equity investment company over five years
A positive outlook for the sector
Andrew Lebus, Manager, Pantheon International Participations, said “The listed private equity sector over the last twelve months has seen discounts narrow significantly from the levels that persisted following the global financial crisis. Even after these price improvements, we believe the sector offers excellent opportunities for long-term investors.”
Tim Syder, Manager, Electra Private Equity, said: “A key theme of the last 18 months has been the growing number of financial institutions releasing capital from their balance sheets by divesting non-core assets. Capital adequacy has been the central driver. We believe that this pressure will continue to create investment opportunities for private equity firms like Electra Partners.”
Alex Barr, Manager, Aberdeen Private Equity, said: “It’s a good time to invest in private equity. With plentiful availability of debt from many sources, and statistics suggesting that the worst of the macro environment may be behind us, particularly in North America, it’s a good opportunity to buy well run quality companies. The key for private equity investment managers will be avoiding the pitfalls and making sure that they do not over pay for, and importantly over leverage, assets.”
Urs Wietlisbach, Manager, Princess Private Equity, said: “In light of subdued economic growth, we continue to view “going global” as a key investment theme. Our global set-up and network can be an asset in helping regionally-focused mid-cap companies execute a more global strategy, making them increasingly attractive to potential acquirers, even in a volatile market. We also continue to find pockets of opportunity within larger sectors which can be “defensive”, even in a sluggish growth environment, albeit with a consistent focus on pricing.”
A healthy exit environment
Andrew Lebus, Manager, Pantheon International Participations, said: “Private equity has outperformed public markets over the long-term. By investing in private companies, private equity investors can gain access to a much larger universe of opportunities worldwide than can be obtained through public markets. In today’s more stable economic environment the component drivers of outperformance remain in place. Investment activity has increased whilst the exit environment remains healthy, driven by trade sales as cash balances on corporate balance sheets remain high. We select high quality managers globally who are best positioned to take advantage of the changing environment.”
Urs Wietlisbach, Manager, Princess Private Equity, said: “Low yields, driven by record low target rates in the advanced world and unprecedented liquidity injections by the major central banks, have pushed investors up the risk spectrum, including corporate bonds, real estate and equities. Covenant-lite lending in the US is back to record levels based on Q1 2013 volumes, the high-yield market is booming and equity contributions in buyout transactions in the US have fallen again. This easier credit and increased leverage continues to feed through into higher prices for companies, creating a positive exit environment for sellers of quality assets.”
Opportunities within the sector
Alex Barr, Manager, Aberdeen Private Equity, said: “For the Aberdeen Private Equity Fund, there are a few areas where we expect to see particularly strong gains over the coming years, fuelled by strong macro trends. The first is in technology. This creates opportunity for all segments of technology from content to hardware and networks and with many of these new companies initially funded by Venture Capital, private capital is well positioned to take advantage.
“Distressed debt looks set to perform well. Over the next five years, Credit Suisse forecast that there is $1.15tn of US non-investment grade debt due to mature. Whilst this is a similar position to 2009, anecdotally there appear to be fewer hedge funds operating which will help keep prices low. Of course if the economy improves, much of this will be repaid and refinanced but with the sheer magnitude there will be opportunities for discerning debt investors.
“Lastly, South East Asia continues to be attractive irrespective of current public equity market wobbles. With China’s competitive advantage in labour terms seemingly easing, it opens the door for countries such as Indonesia and Malaysia to promote themselves on a global scale. They also have significant latent domestic demand – our expectations are that the region will add more than 350m people to the middle classes over the next decade.”
Urs Wietlisbach, Manager, Princess Private Equity, said: “As an investor, we continue to favour small/mid-cap transactions at less demanding entry multiples, with a focus on value creation through operational improvements rather than financial engineering. While entry prices for quality mid-market businesses have seen some upward pressure reflecting easy credit conditions, significant volumes of “dry powder” approaching the end of investment periods and competition from cash-rich strategic buyers, we continue to see attractive opportunities sourced from proprietary deal flow.”
Andrew Lebus, Manager, Pantheon International Participations, said: “Financial sector reforms will continue to stimulate the secondary market for private equity fund interests. Our international network of offices ensures we can source opportunities from financial institutions globally in the private equity funds that we think are best positioned to create value in today’s uneven economic environment.”