Partners Group ‘more neutral’ towards PE as valuations affect appeal

Partners Group has adopted a “more neutral” view of private equity as pricing and competition diminish its appeal.

The firm has downgraded its allocation to certain segments of the market, including European and US mid-caps, to which it had previously elected to overweight, according to its Private Markets Navigator for 2019. It will now underweight its allocation to US media and telecommunications businesses due to overstretched valuations.

The Zug, Switzerland-headquartered investment firm has also raised the multiple contraction assumption used in its underwriting to 1.4x, up from roughly 0.5x for investments made in 2016, the report noted. Multiple contractions refer to a possible reduction of the EBITDA multiple over the life of an investment made in 2018.

“Our relative value outlook has turned somewhat more neutral on the asset class,” the report noted. “The overall market remains highly competitive, with unusually elevated valuation levels and select pockets of opportunity from a macro perspective.”

Partners Group’s average purchase price multiple for European and US LBOs was 10.7x and 10.5x EBITDA respectively as of September, according to the report. This compares with a typical large-cap range of 13x to 15x.

Partners Group said it would account for elevated valuations through a two-pronged strategy: investing only in 1 percent of the opportunities it screens and conducting pre-process due diligence on potential target companies before they come up for sale.

The firm has started to hold portfolio companies for longer periods and will own assets for up to 15 years in some cases, up from the standard industry average of around five years, executive chairman Steffen Meister said in its first-half results presentation on 11 September. The move comes amid increased focus on value creation to generate stable cashflows.

Its latest report identified rising interest rates in the US, the potential effects of trade wars and structural challenges in Europe as likely drivers of volatility in capital markets. This in turn could reduce valuations over the long term.

“This is typical for the later stages of an expansion, especially in a market where elevated valuations are largely based on a low risk-free rate,” the report noted. “Over a five-year horizon, we expect valuations to come down in light of higher US inflation and rising interest rates and incorporate this into our base case underwriting assumptions across asset classes.”

Partners Group’s head of private equity David Layton is to replace Christoph Rubeli as co-chief executive from 1 January, the firm announced in September. It is on a hiring spree to match anticipated AUM growth for the year, making up to 150 hires by the end of the year.