Stronger market fundamentals spurred a wave of new commitments in the second half of 2010, a trend that is likely to continue into the new year, says John Robertshaw, co-head of the Credit Suisse Private Fund Group.
“The turnaround started in June. In first half of the year, the level of commitments fell,” Robertshaw said. “Some of the reasons are cyclical. Remember, there is a strong correlation between private equity and the debt and equity markets.”
The final tallies for 2010 are still being tabulated, but private equity’s slice of the M&A pie has grown this year, making up 14 percent of the deal flow for the first nine months of the year, up from 10 percent last year, according to analysis from the Credit Suisse Customized Fund Investment Group.
“More recently debt markets have been benign to financing, which leads to more M&A activity. In that environment, GPs have favorable conditions for exits. LPs obviously like this too, which is why we are seeing more re-ups,” Robertshaw said.
More than ever, the best performers are getting attention.
Going into the final quarter of 2010, investors likely had more cash on hand. There were 290 IPOs through the end of the third quarter, as compared with 177 for all of 2009. And in 2010, 62 percent of IPO transactions in US were sponsored by private equity firms, according to analysis by Credit Suisse.
While M&A activity and select exits proved a boon to the US private equity industry, Robertshaw says 2010 was largely a rebuilding year, across the credit spectrum, for private equity funds.
“In many ways, private equity is the end product of creating value and managing credit volatility,” he said.
Robetshaw says limited partners in 2011 may look to smaller agile funds as well as larger funds that fall into the top-quartile based on performance.
“More than ever, the best performers are getting attention. If you ask LPs if they are interested in a mega-fund, the answer is still likely no. But as they say, performance wins the day regardless of where people think we stand in the economic cycles,” he said.
In an effort to ensure better returns in challenging markets, private equity investors opted to construct more concentrated portfolios in 2010, a trend that may intensify in 2011, he said.
“Limited partners are supporting fewer GPs. And GPs themselves may be focusing on fewer core
opportunities,” Robertshaw said.
The most popular sectors with investors of late have been oil and gas, mezzanine, and selective credit strategies. But niche strategies may become more popular in 2011.
“Credit heavy strategies, including ones that use high-yield, are popular because they allow you to mitigate the J –curve,” he said.
Agricultural and commodities sector investments are also gaining interest because of concerns over inflation and demand from Asia, he said.