A fresh perspective on dry powder

One trillion dollars – that’s the massive sum the world’s private equity firms must find somewhere to invest. It would buy you around 12.5 million nights in the Royal Penthouse Suite, the world’s most expensive hotel room at Geneva’s Hotel President Wilson, the site of last week’s Invest Europe Annual Investors Forum.

Demand for private equity continues to rise as growing numbers of investors look to the asset class for benchmark-beating returns, and GPs seek to capitalise on that enthusiasm. At the same time, valuations are sky high and deployment rates are starting to slow, making the challenge of where to invest a very real one for many.

A talk by Helen Steers, partner and head of Pantheon’s European Investment Team, put a much more positive spin on the subject, highlighting several reasons to be cheerful. For managers not keen on blowing their capital on a hotel suite, here are a few avenues Steers highlighted:

Move down the maturity curve

Companies are staying private for longer, so VC-backed companies that would once have been too risky for private equity firms to invest in are becoming increasingly attractive targets. In fact, around 20 percent of VC-backed exits were to buyout funds last year, Steers said. Private equity firms in turn are becoming increasingly tech-minded to take advantage of these opportunities.

“Private businesses are shying away from public scrutiny and the focus on quarterly earnings,” she said. “In 2016, private companies raised about $100 million prior to IPO. That was only $10 million 20 years earlier.”

Take a look at take privates

Public markets are shrinking, not just due to entrepreneurs deciding not to list, but also the actions of managers and shareholders. The number of take-privates in the US and Europe has increased by 26 times over the last 20 years, Steers said, as companies look to shed the reporting requirements that a listing brings and focus purely on growth. There’s nothing to suggest such deals have had their day.

Buy into buy and build

The buy and build business is flourishing in Europe, with private equity firms using platform companies to hoover up smaller entities as if they are strategic buyers. Perhaps one of the best practitioners is Waterland, which last August held a €2 billion first and final close on its seventh fund after just two months in market.

“These deals often don’t appear in the activity numbers,” Steers said.

Don’t underestimate the potential universe

According to Steers, 87 percent of the value of the London Stock Exchange is concentrated in companies worth more than €2 billion. Private equity funds already tend to invest in smaller companies and there are an extra 1.6 million private enterprises in Europe that employ more than 10 people. Sure, many won’t be ripe for investment, but the opportunities are there if you’re willing to look.

“I’m not saying that $1 trillion in dry powder is a small number,” she said. “But there are many ways of expanding our activity and many of these are happening.”