‘The clock is ticking’

London-headquartered Duke Street recently revealed strong performance in its annual review, with two funds reporting an overall value increase of 17%. Since 2009 it has done two deals and exited four companies, returning €300m to Fund V and generating a 2x sterling return. PEI recently spoke with managing partner Peter Taylor to get his views on today’s private equity environment.

Is it a buyers’ or a sellers’ market right now?

That’s something we are asking ourselves every day and with every deal we look at. I’m sure everyone else

Peter Taylor

is asking that question, as well. We do think that there is a two-tier market at the moment, and one that is more polarised than we’ve seen for a very long time. The first tier is companies that can be easily auctioned, with the second being those companies that can’t.

For me, this is the big issue in the market: what can be auctioned and what can’t. So within the category of what can’t be auctioned, we try to find the good businesses that are in there and that can be made auctionable in the future. That’s our mission: to turn non-auctionable businesses into auctionable ones.

How key are LP co-investments in this environment?

I think there’s a bigger market for co-investments by LPs, and it is becoming more important. For Oasis, our dentistry business, we put some money ourselves into the deal but we also brought in one of our LPs as a co-investor. It’s becoming one of our larger assets, so we didn’t want to get overexposed on a single asset – a strong case for bringing in an LP as a co-investor.

I don’t think it’s something that will be happening a lot more in the short-term. It will depend on the size of funds people raise during next round of fundraising. The more of a downward pressure there is on fund size, the more need there will be for co-investment to help new acquisitions.

How worried are you about the AIFM Directive?

The AIFM shouldn’t be a big deal if it comes out the way we think it will. Our general view is that whilst it’s going to be kind of irritating and add cost to the business, it’s not particularly damaging and won’t threaten what we do. It’s just going to be some tedious compliance and additional beaurocracy, frankly – none of which seems any good at protecting investors.

What is keeping you up at night at the moment?

The one thing that bugs me, or nags away at me, is the state of the banks.  I don’t think we’re going to see a return to 2008, but my concern is that it’s still quite opaque. How much capital do the banks need to raise? How they are going to manage their own funding? And when are they are going to lend more aggressively again? I don’t mean cheaply – I’m not talking about a return to where we were – just a push to get more momentum back into the deal market.

Debt’s going to be more conservative and more expensive. That’s fine, we can all live with that; but I still don’t think the debt market is currently functioning properly, and that would be my main concern. When a market is functioning properly, you know what kind of acquisitions can get financed and then execute quickly.

What are your expectations for the rest of the year?

I think we will see continued pressure to invest. There are a lot of private equity firms out there that still have a lot of capital to spend, and the clock is ticking.

There will also be some increased pressure to sell.  Clearly private equity firms need to deliver exits before going fundraising, and everyone is going to have to raise a new fund at some point within the next couple of years.

Are there any new trends you think we will see emerging?

I still think with private equity generally that it’s a people business. I know that’s a cliché, but we’ve seen some key man issues in some of the well-known funds. There are still a lot of private equity firms facing transition or succession issues, so I think we are going to see more of these issues in the market, and who knows where that leads to?