rivate equity has changed in the 10 years since the financial crisis. The trend, as seen elsewhere in asset management, seems to be for the big to become vast, the small to operate as boutiques, and the medium are left as neither one thing nor the other.
The big have certainly become very much bigger. Blackstone is some 20 times larger than it was in 2005. It, Apollo, CVC, Carlyle and a few others now account for roughly 50% of assets; the other 50% are spread among hundreds of other firms.
Investors are similarly more discerning: pension funds and others are moving money to the big players and cutting out small to medium ones. The mega funds, too, are choosier about whom they will accept. The business is maturing and with it come lower returns for less risk.
Nor are the firms just private equity — there’s other stuff too, particularly credit, property and energy. Private equity titans have also launched long-term funds. They talk of great businesses which they want to own for a long time, rather than flipping their assets after five years. Mind you, it is largely talk.
Meanwhile, equity markets are shrinking: market capitalisation measures show that the markets are generally rising, but this is from fewer and fewer companies. The shrinkage is caused largely by the buy-back market in the US over the past 10 years which has been greater, at $5 trillion, than the amount of quantitative easing by the Federal Reserve. In addition, some firms fold or merge and there is a shortage of initial public offerings. It is becoming more difficult for private equity to find companies to buy out.
Tencent, Alibaba and other Chinese firms are buying stakes in promising tech companies not just in China but wherever they can go which makes it more difficult for private equity players.
Values are stretched. Markets are high. Private equity should be selling assets. Instead they have large funds which they cannot deploy. They have the firepower but not the target. Globally half the deals have a multiple of 11 times earnings which is as much as in 2007. Covenant-light loans are commonplace. Leverage is back with a vengeance. Finally, the industry still suffers from academics and others who do not believe the returns are worth the fees. Private equity counters by talking about operational excellence.
But it is worth pointing out that small firms can buck the trend. Connection Capital, a small London alternative assets manager, says it has rarely been so busy — but it makes investments, and private placements, where the equity stake might only be £3 million to £7 million. Also private equity buyers have funds for only 10 years, in which time they must sell their assets if they have not already. Connection has no such constraints.
It helps too that many businessmen think there is a good chance that Jeremy Corbyn and the Labour Party will win the next election. A few, apparently, want to relocate overseas, though far more want to take some cash out but still run their businesses in the UK.
These are the ones who look to firms such as Connection Capital where their cash is replaced by private equity. So even if the mega funds have a difficult time, the chances are that Corbyn fever will be a major factor for the smaller firms in the coming months.