Experts Predict New Direction for Private Equity after A Big Year


January 6, 2015

As business returns to normality after the festive season, experts are predicting big changes in the private equity industry. 2014 was a massively successful year for the industry, although the previous 12 months also saw its troubles. What are the big themes analysts are expecting to see in 2015?


Continued Deal Activity
Perhaps the biggest news to take from 2014 was the increase in private equity deal activity. Fortune reported on Monday how global deal activity increased by 47% between 2013 and 2014.


Furthermore, according to the data highlighted in the Fortune report, big deals helped boost the numbers in mergers and acquisitions. Private equity’s stake in global M&A deals also increased to accounting nearly 21.9% of all the deals, which is an all time high. For many, it is hard to see that deal activity would go on the decline in 2015.


Plenty of Equity But Fewer Opportunities
But analysts are fearful that the big deals and high valuations are driving the industry to the wrong direction. In a Wall Street Journal interview, Guy Hands, the chairman of Terra Firma Capital Partners, said the biggest problem in 2015 is going to be the legacy of “an environment where the valuation of companies has been pushed up by the availability of cheap money with fewer opportunities to buy”.


It is more than likely that 2015 will continue to see some big deals, with different private equity firms competing against each other. But the scarcity of deals also means that private equity firms are looking at new opportunities.


Looking Into Permanent Capital
One new opportunity that is attracting private equity is looking into permanent capital. The industry is likely to continue moving away from traditional funds, which provide investors with stable opportunities to withdraw their money, towards permanent funds.


According to a Financial Times article it is all down to the “Warren Buffett” envy, where private equity firms want to recreate the success of the Berkshire. Although permanent capital vehicles are likely to increase in the coming years, some private equity firms are also trying out a middle ground with longer funds.


For instance, Blackstone and Carlyle are both “trying to lure their investors into funds with a lifetime of up to 20 years as halfway house between the traditional 10-year fund and permanent capital”.


A Flurry of New Companies?
The availability of equity might also make an impact on the amount of private equity funds out there. LBO Wire reported recently that industry professionals are more willing to set up their own funds and firms.


But experts warn that the road to riches won’t be easy. The Wall Street Journal reported on LBO Wire’s findings and said investors are more likely to keep writing bigger checks but to fewer firms, which would mean trouble for new, smaller firms.


The continued slow growth in Europe and the upcoming UK elections will also shape the industry in 2015. Many experts believe private equity sector will continue to flourish, but there’s plenty of room for caution as well.

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