How Private Equity Trends Are Changing Deal-Making
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How Private Equity Trends Are Changing Deal-Making

Private equity is evolving. As this asset class gets larger and more versatile, companies have a surprisingly diverse menu of private capital options when it comes to finding finance. As private equity evolves, what are the key trends changing the nature of the deal?

We often hear that the world is changing at an accelerating rate. In addition to technology, private capital sources are a large force behind these changes as well. Coupled with growth in funds under management, fund strategy expansion is allowing more efficient matching of companies' needs with capital providers to foster and accelerate change.

As fund managers expand the "tool box" of capital available to enable transactions, the speed and ease of deal making in, and the depth of, private markets has made the public market options relatively less attractive. In fact, the number of publicly-listed companies in the US market has dropped by 20 percent over the past 10 years, and by 50 percent over the past 20 years.

Private equity capital consists of "conventional" private equity, as well as private debt, real estate, infrastructure, and natural resources. The assets under management (AUM) in this category currently are about $5 trn, which is now more than 20 percent the size of the entire S&P 500 … and it has been growing in excess of 8 percent per year for more than a decade. Whereas a decade ago, the average buy-out fund was about $560 mn, in 2017 the average buy-out fund was $1.3 bn.

New Opportunities as Private Equity Expands Its Horizons

As an asset class, private equity is now growing not just in size but also in the diversity of the kinds of businesses in which it invests. Its relevance to Boards and CEOs lies more in how private equity is expanding its traditional horizons, becoming more multi-strategy, more global and – in some cases – much more long-term.

The multi-strategy change is both quantitative and qualitative. We see that conventional buy-out funds have grown at much slower rates than all other classifications of private equity. At the same time, the kind of assets to which private equity capital is attracted has broadened considerably. Private equity funds run the gamut of those focused on lower quality, cheap or distressed assets (often credit plays) all the way through to market-leading companies at the top of their game, commanding premium valuations.

Private equity continues to expand both its global and investment horizons, as well as taking a wider view on the quality of assets in which to invest.

At the bottom end of the spectrum, there is often no other bidder, whereas at the top end it can seem as if price does not matter. While some firms and some funds specialize in parts of this spectrum, others seek to do all of this. Private equity continues to expand both its global and investment horizons, as well as taking this wider view on the quality of assets in which to invest. All of these changes in how private equity evaluates opportunities serve to expand the type – and the number – of companies private equity looks at.

Private Equity at Every Life Stage – 3 Trends to Watch

So what does this all mean, and how are these trends relevant for corporations? First, the growth of the asset class as a whole will continue to provide liquidity to companies and, in many cases, to drive up valuations. As the capital pool to invest increases, so will the number of companies that are the targets of private equity attention, in effect providing a "private equity floor" to those companies' valuations.

Second, the attractiveness of being a public company has diminished somewhat in the past decade, due to regulatory pressures and costs. In addition, the market response can be brutal for companies that miss quarterly earnings expectations. As a consequence, there are more companies choosing to go private or to stay private for longer. The heft of private equity capital provides a ready resource for such companies to tap, providing funding for growth.

Third, the expansion of these funds geographically and thematically dramatically increases the ways in which they can be used by corporations. In short, it does not matter where you are, either geographically or within your life cycle. The broader interests of private equity can serve as useful partners to help companies fix any problem and transition through any phase, e.g. from the distressed credit situations all the way through the spectrum to the best-in-class players who need help with their growth phase.

Private equity continues to evolve. As an asset class, it continues to grow rapidly and expand the conventional boundaries of private equity. With this liquidity and depth, it is easier now than ever before for companies to find private equity partners to help them fix their businesses, guide their growth strategies or provide novel financing solutions for companies in transition.