Private Equity industry's assets under management grows to $2,500 billion

26 April 2017 Consultancy.uk

Private equity firms have enjoyed strong growth in assets under management, hitting a record $2.5 trillion, while investors have enjoyed strong returns on their investment. The industry is seeing increasingly larger numbers of active PE firms, while investors are becoming increasingly active themselves in the investment process. The changing dynamic within the industry creates opportunities and challenges for investors and PE firms alike.

The global private equity (PE) industry has enjoyed a good run over the past decade. While the financial crisis put a dent in exits, the recent recovery, and the sale of pre-crisis stock lead to a boom in deals. Interest in the industry from a range of global, often large capital stakeholders, such as sovereign wealth funds and pensions funds, looking to generate strong yields – the industry has in recent years outperformed other major asset classes.

The sustainability of the boom is, however, by no means certain. To explore the industry, as well as key factors that may come to affect it in the longer-term, The Boston Consulting Group (BCG) explored the industry’s fundamentals in its ‘Capitalising on the new Golden Age in Private Equity’.

Number of firms and assets under management rise to record levels

The boom of the industry has given rise to increased interest from players seeking to make bank from the success of the industry. The number of PE firms has increased steadily since the early days of the industry in the 2000s. Last year there were around 4,700 PE firms operative globally, with around 7% (319) of those firms new to the game. The increase in the number of firms active in the arena continues to rise year on year, although the addition of new firms has yet to reach the levels seen in 2008.

The industry as a whole has seen assets under management increase by around $1 trillion since just prior to the financial crisis, when assets stood at $1.4 trillion. Aside from the seemingly ever increasing number of assets under management, the industry is also flush with dry powder, totalling around $900 billion.

The biggest firms are becoming ‘one stop yield shops

The high level of dry powder, resultant from the increased interest of large capital holders, and low interest rates, means that some of the larger funds are oversubscribed, creating opportunities for smaller players, and funds, to get in on the action.

Competition within the industry has increased as more and more limited partners (LPs) seek to become directly involved in the industry, coming to work more closely with GPs, having their own internal teams trained in the art of good PE stewardship or seeking co-investment opportunities. The latter particularly has been found by LPs to improve their returns on investment, by, among others, reducing the fees paid by the LP.

The current environment benefits particularly LPs with large capital, which are able to access the top performing funds, as well as reduce their fee burden, while smaller LPs have difficulty negotiating fees, while smaller funds find themselves needing to compete for investor interest by, among others, lowing fees.

The research notes that large funds have additional benefits for LPs, due to their relatively broad spread of PE asset classes, offering a broader risk profile for the investors and their fickle stakeholders. The top five funds, for instance, are relatively diversified – The Blackstone Group is almost evenly distributed across PE, real assets, credit and hedge funds, while TPG capital and Apollo Global Management are the least diversified of the large funds, at 71% PE and 72% credit weighted respectively.

PE Firms are among the top employers worldwide

In addition to the top five largest PE funds’ large asset clout, they are also some of the world’s largest employers. In the US for instance, the firms employ more than 960,000 people across their portfolio companies, considerably more than the US Postal Service, Kroger and McDonald’s, although well behind Walmart on 2.3 million. In Europe, however, the top five are the combined largest employer across their companies, well ahead of Volkswagen and Compass Group. In the Asia-Pacific region the top five firms take fifth spot, behind Stage Grid but ahead of Sinopec Group.

The large and global presence of the industry has resulted in increased regulatory focus, as governments take more of an interest. The industry is also finding itself at the forefront of wider transformations in terms of sustainability, in part driven by LP demands and in part due to improved returns on investment. According to the consulting firm, the industry finds itself on the forefront of wider moves to improve the social and environmental business imperatives, over merely maximising profit at the expense of social and environmental consequences.

“The current conditions are favorable in so many ways, but there are also challenges looming ahead,” says Tawfik Hammoud, a Senior Partner at BCG and the lead author of the article. “We think top managers will use this as an opportunity – or even an imperative – to sharpen their thinking, improve their discipline, and be bold in several dimensions of their businesses.”

×

Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.