Crystal ball gazers see more co-invests in 2016

The annual press luncheon hosted by Adveq involved attendees each making a prediction for private equity for next year and reviewing last year’s expectations.

At fund of funds manager Adveq’s press luncheon last week, attendees including Adveq professionals and members of the media took turns making predictions for private equity in 2016.

Four of the 14 people attending said the PE industry will see a continuation or an increase in LPs co-investing and direct investing, and a few of them voiced expectations for further spike in dry powder and another record year of fundraising.

Recently fund advisory Triago noted in its quarterly report that shadow capital, which consists of co-investments, direct investments and separate accounts, jumped 90 percent to $127 billion in 2014 from a peak amount seen in 2008, as reported by Private Equity International.

The Private Equity Growth Capital Council released a trend report in November noting that dry powder for global buyout funds rested at $486 billion in the third quarter, an increase from the $448 billion at the end of 2014.

Other predictions made at the table included that more smaller LPs would enter private equity, perhaps in light of retail investment vehicles such as the one that AMG and Pantheon launched this fall; variations in the traditional PE structure, such as a shift away from the classic 2-20 model; and a different life length of a fund.

Advent International recently launched its eighth flagship mega buyout fund, Advent Global Private Equity VIII, without a hurdle rate and a 1.5 percent fee on committed capital from LPs rather than the traditional 2 percent.

Others speculated that cybersecurity would be a key concern and others said that LPs would be willing to take more risk by, for example, investing in venture capital funds.

The predictions for 2015 made at last year's event included “peak fundraising levels,” “more innovative fund structures,” “regulatory challenges/pressures will spill over from 2014” and “slowdown of fundraising.”

Indeed pressures on transparency has led to the California Public Employees’ Retirement System’s inaugural release of its carried interest data last month. However, while third quarter fundraising has slowed down, Triago expects $468 billion to be raised by traditional PE funds in 2015, second only to the $557 billion record in 2008.

Adveq also said that the key elements of a successful environment today include small, specialised and turnaround funds finding low entry prices and de-risked capital structures with an “intensive focus on value creation” to eventually find opportunistic exits.