As a provider of high-value content, I seek not only to maintain my top-decile status but to verify and report that status to those who invest their time, money and intellectual energies in my content. To that end, it is time for the first annual report on predictions I made a year ago regarding what trends will change private equity during the 2010s.
A caveat – we are still early in the 10-year life of these predictions. Some of the predictions that appear to be coming true are immature and unrealised successes, while other predictions that look wrong may be undergoing a period of “untruthiness” leading up to a future upswing of veracity (the forecasting J-curve).
Below is what I said would drive the 2010s back in January. I’ve rated each prediction with one of four interim scores: clearly prescient, probably true, maybe not, and bad call.
“Returns will come down”. Measuring the performance of private equity as an asset class is such a fraught process that, unfortunately, one of the most important considerations when viewing statistics on this subject is the bias of the analyst. But it’s not radical to say that the all-important long-term average performance figure is going to be smaller over the 10 years following 2010 than it was for the 10 years leading up to 2010, because having the large, weak funds of the 2006 to 2008 vintages in the mix is going to add significant weight to returns. Probably true.
“Costs of business will increase”. This year saw the onslaught of AIFM compliance in Europe, SEC registration in the US, smaller funds, pressure on fees and higher limited partner expectations on service. And PEI Media’s top-selling book right now is “The US Private Equity Fund Compliance Guide”. Clearly prescient.
“Non-Western markets will blossom”. In 2010, non-Western private equity was in full bloom. It is difficult to say whether investors are flooding into emerging markets private equity because the opportunities in China, India, Brazil and beyond are viewed as attractive, or because the outlook for Western private equity is viewed as unexciting. Whatever the case, a series of setbacks in emerging markets private equity, coupled with a performance uptick in so-called “safer” Western markets, would take away some of the bloom. But only some. Probably true.
“Private equity will remain entrenched in the portfolio”. The past year has seen institutional investors re-evaluate private equity vis-a-vis other asset classes, but almost none of them want less private equity. They just want it to be better and cheaper. Some believe the path to this improvement lays in separate accounts and co-investing. Private equity will remain entrenched, but it will be a very different asset class at the end of the 2010s. Probably true.
“Fundraising 2.0 will emerge”. A bold and dominant new way of forming capital for private equity may be around the corner, but in the meantime the only way most firms have of raising funds is through strenuous, road-tripping, LP-smooching campaigns of two years or more. This is basically a more difficult version of Fundraising 1.0. Maybe not.
“US public pensions will fade as a source of capital”. You now need to register as a lobbyist if you want to raise money from California institutions, thanks to the pay-to-play scandal. More broadly, US pensions are expected to continue to face tremendous pressure going forward. It is unclear what this means for their private equity allocations, but for the time being most of these very large LPs remain committed and solvent. Maybe not.
“The public private equity firm will win fans”. It is clear that many more private equity firms will go public as soon as they have the chance. But few of these will remain pure-play direct private equity investors, as KKR’s radical business diversification indicates. These listings will be greeted warmly by investors, by the selling GPs, and by the firm employees who get a piece of the action, if not by LPs. Probably true.
“Spin-outs will spring eternal”. The year a major spin-out does not happen in private equity land will be the year of the apocalypse. Clearly prescient.
“A new ‘barbell’ will emerge”. There will always be many smaller firms at one end of the barbell. And there will clearly be a handful of enormous firms at the other end. But news of the demise of the firms in the middle is, to date, premature. Maybe not.
(No “bad call” ratings. Whether you trust valuations assigned by the GP himself is up to you.)