As the New Year approaches, we thought we’d offer our readers 12 predictions for the private equity market in 2007. Our song answers the question: “What will our true love – the private equity market – bring to us 2007?”
Twelve agents raising. The total for 2007 is unlikely to break the stupendous fundraising record set in 2006, mainly because some of the largest funds have closed recently. Although with Apax Partners, Warburg Pincus and The Carlyle Group all vying for attention, it is can only be another big year. The signs are that Carlyle will emerge with bragging rights attracting capital from multiple sources through multiple types of vehicles.
Also claims that investors have already spent some of 2007’s allocation are over-cooked. If they run out of capital in 2007, then there’s always 2008’s budget to plunder
Capital will still be deployed at a rapid pace and many firms will return with new offerings sooner than expected. Groups that raised $1 billion last time will triple in size without anyone raising an eyebrow.
Eleven marts emerging. Emerging private equity markets will remain near the top of the agenda of many. Brand-name GPs will open new offices in new markets (keep an eye on Johannesburg for instance), LPs will push more capital into Asia, Eastern Europe, Latin America and Africa. As a proportion of total equity capital raised, emerging markets private equity will make its biggest contribution yet.
China will finally deliver a handful of medium-sized buyouts, but don’t expect a wave of control deals in the country. Buying into China’s state-owned enterprises has proved to be possible, but it is still a difficult task.
Ten deals defaulting. Distressed debt is going to dominate the headlines as an increasing number of highly and inappropriately leveraged deals nudge up against their covenants. And then crash through them. Creditors clamour and triumph in debt for equity swaps. Fulcrum credit investing is the name of the hedge fund game.
Nine corporates crowding. As we near the top of the cycle, trade buyers become more acquisitive, putting their huge war chests of cash to work and taking advantage of their more valuable share currencies. This will pose serious competition to private equity buyers. It should also continue to provide a useful exit for all but the biggest buyouts, which have to chance their arm on the markets.
Eight regimes rulemaking. Newly established lobbying groups acting on behalf of the large buyout firms in Europe and the US will try hard to explain to the world why private equity is a force for good. Winning the hearts and minds of regulators and politicians is the most important challenge facing the industry next year. As they personally join the debate, expect captains of private equity popping up on news channels near you. In Asia, the Lone Star fiasco in South Korea will cast a bigger shadow over private equity in the country and elsewhere.
Seven sectors surging. Cleantech will be the growth investment theme in private equity worldwide. With climate change looming large on everyone’s mind, alternative energy funds will be one of the sector specialisms of choice. More generally the market will polarise ever more, split between global or regional generalists and sector or country specialists. How are you going to differentiate your firm?
Six hedge funds failing. Convergence will play negatively too. While the hedge funds have put the tanks on the private equity’s well manicured lawn, Amaranth showed how easily one bet can unravel the firm. The buyout firms will need little encouragement to snap up the bargains in any hedge fund’s buyout portfolio, if the going gets tough.
Five Gulfstream jets! GPs will spend even more time on airplanes.
Four floating firms. Other firms with private equity businesses will follow Fortress Investment and sell a portion of its management company to the public. It also seems inevitable, given the fees the banks rake in, that another house will look to emulate Kohlberg Kravis Roberts and Apollo Management and list a fund on Euronext. Maybe even Doughty Hanson will have another crack at it, but this time in London, once the regulator relaxes the rules. Don’t expect a flood though.
Three big bangs. The largest LBO-backed bankruptcy in history will occur. The industry will be rattled, but it will march on. The world’s first $50 billion buyout will be announced before the summer. And it won’t be in real estate. Leverage multiples will hit a new high. Again. But this year they will probably be a high-watermark for the cycle.
Two hostile bids. Private equity firms will go hostile on a member of Germany’s DAX 30 index. However, Europe’s busiest buyout market in ’07 will be France.
And a top award in private equity. If you have not already voted for the 2006 Global Private Equity Awards, do so now. The turkey is in the oven. The kids are playing with their toys. And you have a few minutes spare to take part in our online poll. These are the only private equity awards decided by the industry. If you win, it is the ultimate accolade from your peers. Cast your vote now and validate the poll.
Merry Christmas and a Happy New Year!