Overall, speakers at last week’s Real Deals Mid-Market conference painted a positive picture of prospective European private equity performance in 2020. However, as many LPs believe we are currently at the peak of the market, there were reasons to be cautious as well as cheerful going forward. Here’s a quick round up of some of the key talking points.
Unprecedented dry powder in the global private equity market, which rose from $3.1 trillion in 2017 to $4.1 trillion in 2019, paves the way for plenty of deal making in the year ahead. It also demonstrates how positively illiquid alternatives are viewed by LPs and how mainstream this investment strategy has become in recent years.
In 2019, in excess of $500 billion was raised for the third year in a row. Prospects for fundraising in 2020 remain strong as well, with speakers reporting that LPs intend to invest as much or even more into the market this year. In the UK, much of the fundraising is coming from Europe and North America, with a notable reduction in the number of UK-based LPs. While not immediately impacting funds, this could potentially be a worrying trend for UK-based GPs.
In a crowded and competitive market, we are seeing a decline in the number of funds being raised. Also, funds at the smaller end of the scale, between £500 million and £1 billion, are finding it more difficult to raise capital. One speaker suggested that, with smaller first-time funds, LPs were more likely to commit capital on a deal-by-deal basis initially. This caution from LPs can also be detected in the focus they are placing on a fund’s value creation strategy – the result of shrinking returns amid wider economic pressures.
In terms of recruitment, these trends suggest medium to large mid-market funds will be investing in deal making and investor relations and fundraising teams. There’ll also be an uptick in the need for operations professionals on the ground in portfolios as value creation becomes more challenging. Smaller funds will be more cautious in terms of expanding resources, but now is certainly not the time to cut back due to strong competition in the market.
We’ve seen a particular rise in demand from funds for M&A and acquisitions professionals who are needed to go in-house in the portfolio and create value. Our specialist portfolio M&A team, led by my colleague Charlie Linacre, has an active network of professionals in this area, so please get in touch if you’re looking to recruit.
Venture capital was another big talking point at the conference as European funds catch up with the North American funds that have dominated the market since the 1980s. Globally, 2018 was the best ever year for venture capital fundraising performance, a clear sign that private equity’s daring younger sibling has matured significantly in recent years.
Away from the keynotes and panels, the mood in the coffee queue at the conference (the real gauge of market confidence, in my opinion), was also extremely positive. Challenges may lie ahead in terms of value creation, but investors are confident, dry powder is abundant and investment opportunities abound.