Graham Elton (Bain & Company) : "The LPs tend to think they don’t need an intermediary for a vanilla transaction"
As a worldwide observer of the private equity field, Graham Elton thinks the LPs are going to do more and more simple operations without GPs support.
Leaders League. What is the private equity market today, and how do you imagine it is going to evolve over the next year?
Graham Elton. The market is pretty hot. There is a huge amount of dry powder from the GPs whereas the deals opportunities are still insufficient. So the competition is fierce and unsurprisingly, that is having an impact on pricing. Currently, we are observing some of the highest multiples paid for transactions in the past 15-20 years.
For the beginning of 2016, the dry powder is not going to go away, it’s a fact. As for the dealflow, it’s also unlikely to change and increase abruptly. What may work to the advantage of the private equity is the decline in stock markets. Price reduction of the public equities will do two things. Firstly, the attractiveness of IPOs for sellers should go down, especially for those that have been under a dual track process lately and that may reconsider the private equity offer. Secondly, I think this would also lead to brake the price inflation of the assets because investors look at stock markets to get a sense of corporates valuations. But there is as well a temporal effect to really see these figures go down, so it should not happen before the end of 2016.
Leaders League. Is the high selectivity operated by LPs in their support of GPs going to go forward? Could it be a source of a big consolidation among PE firms?
G. E. Sovereign wealth funds, institutional investors, high net worth individuals are all so keen on places to put their money to work that it is trickling down to the lower performers. But three years ago, when the fundraising market was more difficult, it was only the top performing funds that were raising successfully. Today, fundraising is much easier. The top funds are able to adjust their terms to be favored even more, and the less successful firms, with a poorer track record, raise cash but get less attractive terms in their negotiation with LPs. But I really don’t think we are now in a large-scale consolidation market even though a few companies went out of business.
Leaders League. In the recent past, buyout funds have known less support from LPs to the benefit of other types of funds. Are they fully back on track today?
G. E. Today, they meet no troubles when raising money. But some of their deals could be more complicated if loan rates go up. That could be a concern although they seem to have learnt their lessons from 2005-2005. Until now, there are not many deals that have been financed with too much expensive debt and lots of covenants. Out there, most of the deals get good breathing space as far as debts are concerned.
Leaders League. What do you think of the American trend of VC-PE alliances like the joint-venture concluded by Accel and KKR?
G. E. It’s largely driven by the big American private equity firms that try to become broad multiple-assets class manager, who aim at various locations from which to operate, as well. The ones that are listed as KKR or Blackstone take the lead in that trend. Apart from their structure, the second motivation is to give them eyes and ears, some early warnings on what is going on in the technology world, so that they could apply part of that thinking to what they do in the buyout space. As a result, I expect some value creation from these proactive alliances.
Leaders League. What is the next big thing about to emerge from private equity?
G. E. The big trend beginning to happen now is a division between deals that need real value add from a GP with a specific set of skills and the plain vanilla and lower risks transactions. I believe that, in the past, private equity firms did both of these sort of deals out of the same fund and LPs did not really distinguish among them. But now, the big pension fund tends to think it does not need to pay an intermediary investment firm to do a vanilla transaction. But they will definitely partner with an asset manager over a 2 and 20 % carry for the complex operations.
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