Partners Group “very cautious” on direct large-cap buyouts

In its Private Markets Navigator First Half 2016 report Partners Group flagged the “questionable risk/return profiles” of some large buyout transactions, particularly in Europe.

Partners Group is “very cautious” regarding direct investments in large-cap buyouts, especially in Europe, due to high competition and “the questionable risk/return profiles of some transactions seen recently,” the firm said in its Private Markets Navigator First Half 2016 report.

“Purchase price multiples have been bid up to all-time highs, surpassing pre-Lehman levels”, the private equity investor and advisor said in the ‘Relative Value Analysis’ section of the private equity chapter of the report. The report outlines the firm’s outlook for the next six months.

European firms face increasing competition from both US and Asian corporates that can offer “enlarged distribution reach into significant or growth markets,” the report noted. European “private equity firms must be able to offer similar benefits to their target companies. Given the current macro-economic situation in Europe, this intercontinental and cross-border trend will be a key theme in local private equity in the next few years.”

The firm launched its Partners Group Direct Equity 2016 fund last year, according to PEI Research & Analytics.

In contrast, the firm “overweights” emerging markets given “the reasonable valuations in some markets and the positive momentum of the consumption driven sectors in most regions, despite the challenging economic environment”.

In emerging markets and Asia, including China, the firm continues to seek investments linked to the growth of the middle class, including in healthcare, media and telecommunications, and consumer sectors, “where the impacts of increased personal wealth are more quickly observed”, it said. 

In November, the firm acquired a minority stake in Chinese chain retailer Aiyingshi that sells to the mother and baby segment, as reported by Private Equity International.

In Latin America “it is still possible to find sectors that are resilient to the overall macro downturn or that enjoy substantial tailwinds in certain niches”, the report said, including a focus on healthy eating. In Brazil, it recently acquired a significant minority stake in health food retailer Hortifruti.

The firm is “slightly underweight” in the healthcare industry given rising valuations and competition and strong interest from strategic buyers across all sub-sectors.”

“We are attracted by segments offering transformative growth,” the report said, highlighting information technology in the US and Europe, particularly niche businesses with high recurring revenues and “strong customer stickiness” and high cash conversion levels. It is also interested in consumer-related investments, particularly in the US where consumer confidence is rising.

Prices in the secondaries market are expected to remain high and the firm is focused on assets “with significant remaining value creation potential” and with achievable closing discounts, as well as mature assets where it can see exit routes.

For primary investments, the firm believes that the mid-market still offers the most attractive opportunities. “We focus on disciplined mid-cap funds with differentiated sources of alpha creation, as some managers are beginning to blend into the overcrowded large-cap space,” the report said.

Partners Group has $50 billion in total assets under management, of which $30 billion is in private equity and $19 billion invested in secondaries. It also invests in real estate, debt, infrastructure and listed private equity.

In December, the firm launched its first fund offering targeted at defined contribution pension fund investors, as reported by PEI. The firm has its first US client and plans to roll out an Australian fund early this year, and a UK vehicle in Q1 2016.