Private equity leaders are predicting major change in industry dynamics. New skills will be required, new types of funds, and investment banks may play a less dominant role in several segments of PE, are some of the trends underway. New research from Investec Fund Finance, which was based on interviews with high-level professionals such as buyout executives and advisers , highlights important areas for action which may lead to a stronger private equity industry in the coming years.
The study says that the key challenges facing PE fund managers right now are 1) a highly competitive fundraising market, 2) pressure to generate returns in a low-growth environment and 3) consolidation. These forces drive a need to to “think hard about how to survive”, says Investec.
In addition to market forces, a string of incoming regulatory measures are having an effect which will make it necessary to better communicate the PE industry’s role to society more important.
As far as the types of funds that will be successful in fundraising, the study said that specialist funds are in demand, as well as fund managers that can demonstrate ability to add value or make operational improvements to portfolio companies for greater returns. Financial engineering is slowly falling out of favor.
There was also quite a bit of discussion about the challenges and benefits of going the deal by deal route or pledge funds (aka sponsorless funds or deal-by-deal funds, which we’ve covered in the Digest here ). Duke Street has been quite successful on this front, according to the report.
One bold prediction is that within the next decade the private equity landscape will change dramatically and large, listed asset managers that have evolved from the likes of Blackstone Group and Kohlberg Kravis Roberts may begin to replace the investment banks in certain product lines.
The conclusion is summed up in this excerpt: “This evolution will lead to an increasingly polarised private equity market with the multi-faceted giants at one end and smaller niche funds behaving like corporate partners for entrepreneurs at the other…The large groups will come with multiple products as well as liquid and less liquid funds.
They will help big institutional investors to get more co-investments alongside and therefore be stable long term clients, despite lower returns on their funds. This will be offset by the cost savings of the co-investments.”