Signs of exuberance

Optimism is suddenly rife in the private equity industry. Should we be nervous?

Cast your mind back to this time last year. All the talk was about whether the US was about to go over a fiscal cliff. Private equity's reputation was still recovering from the very public battering it had taken during Mitt Romney's presidential run. The eurozone had become a no-go area for many LPs, following a string of negative headlines in the first half of the year. Asian markets had seen a marked slowdown, with the IPO window slamming shut in China and India. Most GPs agreed that the fundraising market had never been tougher. And regulatory confusion reigned, particularly around the Volcker Rule in the US and AIFMD in Europe.

 

Twelve months on, it's a very different story. This has been a bumper year for private equity cash distributions, as buoyant public markets and generous lenders have allowed GPs to exit (or refinance) some of those deals that have been sitting in the portfolio since before the crisis. With their listed holdings also rising in value, that has left a lot of LPs underweight in the asset class – which many believe they can't afford to be in this low-yield world. So even fundraisings that have previously struggled are now suddenly gaining momentum, as investors seek out new managers to back.

 

Importantly, the political situation looks much more stable than it did a year ago. The US seems to have resolved its fiscal cliff problem, at least for the time being. There's more clarity about the likely practical implications of both Volcker and AIFMD (managers may not like the outcome, but at least they have a better idea of where they stand, on the whole). Even the newsflow out of the Eurozone seems more positive lately, with Ireland recently becoming the first country to exit the bailout programme; it's certainly not a no-fly zone any more (Carlyle, for instance, has apparently put more money to work in Europe this year than ever before).

 

In other words: confidence is up, the money tap is well and truly flowing again, and the banks are falling over themselves to finance deals. No wonder, then, that there are some clear signs of exuberance emerging in today's private equity market. Advisors are already getting excited about what the next year holds, with many predicting big things for private equity in 2014.

 

That’s good news, on the face of it. But it’s also cause for nervousness, given the ongoing questions about how rational this exuberance really is. How sustainable is the public market rally? Will the eurozone problem rear its ugly head again? Crucially, will there be enough good deals out there in 2014 for firms to put all this money to work sensibly? Of course, it would be nice to think that market participants have learned their lessons from the over-exuberance of the boom years, and won't make the same mistakes again. But history suggests that’s about as likely as a GP admitting that it's lower-quartile.

 

 

Anyway, before we put this year to bed and start worrying about 2014, we’d love you to do one very important thing for us: tell us who you think were the stand-out performers of 2013, by voting in our annual awards. Just click HERE to share your views on more than 60 categories across EMEA, Asia and the Americas. What better way to wind down in time for the festive season?