The decade before 2010s was marred by nerve-shredding global financial crisis. The previous decennium, however, saw private equity industry recovering very well – emerging bigger and bolder. What lies ahead for the industry? We take a look at some prophesies straight from industry stakeholders.
Before that, let’s quickly assess how markets are treating the PE industry.
Decadal: 2010s was notably different than 2000s
Private Equity industry is in fine health. Finally surpassing the nerve shredding period of financial crisis, it is performing even better than the highs seen right before the crisis.
Sustained performance of PE firms through 2010s has given investors the confidence to look for capitalizing opportunities. Past decade (2010s) saw three highest fundraising years on record – 2018 being third-highest, trailed only by 2017, and 2016. Big cash is piling up and new players are entering the market every day.
A research by McKinsey shows 25 largest GPs expand their operating teams. Many PE firms are finding new techniques to bring innovative products to the market, improve efficiencies in operations, deal sourcing and diligence.
Private Equity Outlook for 2020s
Dry powder rising up
PE has been through a peak of fundraising period. Private Equity industry is armed with a record level of cash in the 2020. Bloomberg notes, the industry saw about $450 billion worth of deals, and has accumulated over $1.5 trillion in unused capital.
- Given the rising pile of cash, Mergers and Acquisitions deals can become highly pervasive. According to Bloomberg, M&A deals in the 2020s could be seen on a scale never seen since the financial crisis of 2008.
- Another trend emerging from this flush of cash is pushing up of valuations. Given the limited number of deals, there will be high competition between firms, which will lead to high valuation of the companies. Some analysts reported on CNBC, it could also mean disappointing returns for investors.
All things considered, with the dry powder rising up, PE professionals who don’t benefit from it would more likely be at the wrong end of the performance spectrum.
Offense the new defense
Partners Group propounds that in the 2020s, in PE, offense will be the new defense. With geopolitical uncertainties and slowing global economy, identifying sectors and making profitable portfolios will be a challenge. This can be overcome by focusing on assets with above average growth rates; and assets that are involved in value creation. It involves identifying sub sectors and assets with a history of top of the line growth and value creation.
The approach will make industry valuations more resilient and enable PE firms become insulated from economic ups and downs.
Tech remains tempting
Technology companies will remain attractive for PE in the 2020s, with PE investments in tech already ramping up in the last decade. The streak is not likely to stop.
Furthermore, many technology companies (including others) are opting for staying private than going public. For those looking for a career in private equity, times are ripe to jump on its technology bandwagon and lead PE deals in tech sector from the front. A basic understanding and tangible proof of tech know-how will go a long way. To that avail, senior professionals as well as entrants can get certified with new age private equity certifications.
Private markets graduating
Following from the previous one, global private equity market is forecasted to boom further as private markets graduate from the fringes of the economy to mainstream. The trend of companies delaying the process of going public will further private market growth compared to public market capitalization.
The pressure, though, continues to steam up, given overvaluation and LPs demanding returns in time. That said, if the next downturn hits the market in the next decade, professionals will be better prepared to weather the storm – taking hard-learned lessons from the last crisis and savvy management tools aided by technology.