Competition across the private equity marketplace has always been intense, and particularly so when the world’s largest buyout houses, asset managers, and other entities or individuals with wealth to invest are competing for an acquisition or buyout.
The Financial Times has reported that increasing numbers of investors are now looking to make investments themselves, even in instances where they have on-going capital commitments with the private equity fund in question. This could present unique scenarios to both investors and private equity houses, with investors in particular in a position where they might have to seriously question which option is best.
While this is a significant industry development, there will be a wide range of considerations being undertaken by investors. The main motivation for investors “going it alone” is undoubtedly going to be the significant savings they will make in fund fees, while entities such as sovereign wealth funds have been looking for ways to boost returns against record low interest rates.
Those pursuing direct investment will also need to consider who in their business holds specific industry expertise, and whether they are able to open the necessary doors to make deals happen.
This won’t be a concern for the huge businesses that have always had their own investment interests anyway, but for those taking their first steps in direct investment, it is a path that should be walked carefully.
The FT has cited last week’s purchase of almost half of UK motoring and roadside recovery business the RAC by GIC, a sovereign wealth fund from Singapore, from Carlyle Group. Several of the world’s largest private equity firms had enquired about making the acquisition, including Blackstone Group and Cinven.
As well as those that usually invest seeking to do their own deals, in this specific case it could well be that Carlyle were looking to exit yet didn’t want to sell onto another private equity firm. It is believed that the ultimate aim of GIC’s acquisition is to lead to a public listing of RAC.
A knock on effect of this trend could be that private equity firms see their ability to fundraise, and even to put the money they have raised into suitable investments, reduced dramatically. Although this trend diversifying the marketplace, in the long run there could be clear negative outcomes.
Fotis Hasiotis of Lazard, said, “Some pension plans, like the Canadians, and some of the largest sovereign wealth funds are becoming serious competition in the buyout market. Like GIC, we may see more limited partners become more proactive with fund managers they back, by using their knowledge of the portfolio companies to buy stakes directly from them.”
Alasdair Warren of Goldman Sachs anticipates these direct investments will become a growing trend, calling the RAC an “an example where you have strong, cash generative businesses that some of those investors now want to own directly,” rather than as part of a private equity fund with fees, and in some cases a lack of transparency, attached.
The trend is also boosted by the financial industry being very much a seller’s market, although it isn’t helping the buyout firms sitting on near record levels of dry powder.