Friday Letter: PEO's crystal ball

It’s nearly 2006, and you’re probably about to pop open the Krug. Before you do, take a quick look at the following – PEO’s predictions for what is shaping up to be another wild ride on the private equity express. If you thought 2005 was intense, get ready for ’06 – for better or worse, another intriguing chapter of LBO and VC history is about to be written.  

For those involved in the business, here’s some predictions as to what the new season will be remembered for:

First of all, and crucially, the buyout boom is set to continue. Sure there will be accidents, but with current levels of liquidity showing no signs of drying up, large numbers of new deals as well as refinancing’s will continue to get done.

Speaking of accidents though: that long-anticipated meltdown of a couple of irresponsibly geared billion-dollar and/or –euro buyouts will finally occur. This won’t be pretty, and private equity’s critics will have a field day, but what it won’t do is pull the rug from under the industry’s feet altogether – there is just too much momentum in the market for a major slump to happen.  

There will be a deal to surpass RJR Nabisco in terms of scale and headline-grabbing profile: one of the world’s premier brands (be it from the high street or the high way) will be acquired by a syndicate of buyout titans and everyone will pause, murmur briefly about inevitability and pass on. The barbarians have long since broached the gates.

Meanwhile venture will be officially rehabilitated as an attractive allocation destination, for a meaningful number of European besides US managers. Some home run IPOs will not only evidence a resurgent technology industry but also show that good money can be made from investing in VC after all.

CVC Capital will lose its crown as proprietor of Europe’s largest ever LBO fund, the €6 billion structure closed this summer. A London-based rival will go even larger. And a couple of smaller European houses that during their most recent fundraising efforts struggled to secure buy side support will stage impressive comebacks. Think Industri Kapital and Doughty Hanson.  

Still, private equity fundraising overall will slow a little – not because the buy side reaches saturation, but because many of the big beasts have already been to the watering hole. One manager type to partly fill the void: distressed specialists. But on the whole, there simply won’t be enough product in the market to match investor demand. As a result, access will be a key issue for LPs, whilst GPs will worry about fundraising discipline. 

Interest in emerging private equity markets will go through the roof. Already many of the world’s leading PE practitioners are busy implementing plans designed to ensure survival and prosperity in rapidly globalising markets – a trend that can only accelerate. 

As private equity continues to roll the dice, regulators and tax collectors in mature economies and emerging markets alike will step up their efforts to understand the industry’s ways. Expect firms and industry associations to lobby hard in order to persuade the world that private equity is good for everyone – not just general partners.  

And the asset classes own key asset – its human capital – will continue to be priced keenly (a fact to feed many a newspaper headline). Expect also some significant changing of the guard at some prominent GP groups as the new generation steps up – and likewise expect to see a number of high profile departures from GPs where the old guard grimly refuses to give up the reins – or the spoils.