This feature brought together leading figures from the investment scene to debate the trends shaping the private equity and venture capital markets.
What are the trends shaping the Private Equity/VC market?
Suzanne Lupton, Director of Co-Investment, Maven Capital Partners: “Demand for private equity (PE) remains strong. Funds have raised record levels of capital over the past three years, according to Invest Europe, which has been driven by investors’ desire for strong returns in what has been a benign environment across traditional asset classes.
“Persistently low interest rates have favoured PE’s debt-focused model and growing demand has driven asset prices across most sectors, delivering strong returns on exit. Because of the continuing strong demand from investors, there is a significant quantity of dry powder in the market, ready to be deployed – Prequin puts this as £860bn globally.”
David Hall, Director, YFM Equity Partners: “Private Equity has for many years produced good returns, so there is increased funding being allocated to Private Equity and this in turn is increasing fund sizes. For investors, putting more money to work in the sector isn’t easy, and therefore there is encouragement for the GP (manager) to develop their offerings and become a platform.
“The tricky part is the balance of matching the right amount of capital to the opportunities – too much funding chasing too few opportunities is, for the investor, worse than the other way around. Private Equity has traditionally been the preserve of the larger ‘institutional’ investor.
“As fund sizes increase, the prospect is that GPs will emerge that offer the non-institutional or so-called high net worth investor the opportunity to invest in funds that have been difficult for them to access in the past.”
Andrew Barratt, Managing Director – Shaw & Co: “Working up the cheque size – EIS investment remains popular with individual investors still attracted to the tax rebate and CGT free environment, with the annual limit now raised to £2m this market is growing.
“The VCT market is getting itself aligned to the new rules which are forcing investment in earlier stage and more risky businesses. Naturally, this is encouraging the VCT managers to invest in more opportunities per year than they have in the past.
“VCTs are still raising health levels of funds that will continue to make their way through the system in the coming years.”
On mid-market private equity, Andrew commented: “Mid-Market PE is well established and the number development capital funds (or minority investment) rather than buy-out funds has increased to take advantage of the market left behind by the banks after the crisis of 2008.
“This said, we are seeing an increasing number of debt options, such as the Unsecured Loans of £500,000 to £5m from Shaw & Co partner Caple, as a real alternative to equity for more established businesses. We expect these debt products to put pressure on this part of the PE market in coming years.”
How are co-investments impacting the market?
Suzanne: “A key trend has been the growth of deal-by-deal co-investment, whereby institutions and professional clients co-invest alongside GPs in selected transactions.
“Co-investment use has increased in recent years, according to Prequin, where the number of fund managers that offered co-investment rose from 52% at the end of 2015 to 64% at the end of 2017.
“This is a trend that we expect to continue as investors continue to seek the lower fee environment that co-investment offers, a bespoke approach to portfolio construction and the ability to invest in sectors and companies that fulfil their risk/return preferences.”
what about investment in alternative assets in real estate?
Suzanne: “Another strong trend is growing investment in alternative assets within real estate. Among Maven’s own investor base, there has been strong demand for hotels and student accommodation, which have experienced strong levels of investment activity.
“Knight Frank reports that in H2 2017 investment in hotels grew 44% to £5.5bn, while student property investment totalled £4bn, up 25% on the previous year and both are expected to continue their strong performance. To maximise returns for investors, Maven focus is on purchasing assets where there is the potential to add value on change of use through refurbishment and redevelopment and for capital gains to be made through active asset management.”
Is the value of PE exits predicted to rise or fall in the UK in the year head?
David Hall: “Following the Bank of England’s lead, the weight of money coming into the sector and seeking return seems to be continuing to push prices up in the mid-market and above. This trend looks set to continue and buoyant markets have also helped healthy exits. In the short-term it’s primarily the uncertainty of how the UK is going to disentangle the current trading relationships with Europe that could slow this down.
“The increasing weight of money has left a gap for the smaller Private Equity investments (less than £10m equity) and whilst there are a few players looking to plug this gap, it will be interesting to see if this provides an opportunity for the private/family office market to invest in smaller funds. It’s something that we are seeing, and it could signify the beginning of a trend in the sector.”
What are the future events that could impact the market?
David Hall: “The short-term uncertainty around our future trading relationship with Europe is very likely to slow down investment decisions for many. If businesses can’t plan for the long/medium term with some reasonable certainty, it’s very difficult to make an informed investment decision.
“All decisions are a balance of risk and reward and if you can see the risk but can’t measure the reward then caution is likely to prevail making it easier to defer and make the necessary defensive investment. These are the macro factors at play that are likely to impact the market. In the long term there will be clarity, but until then it’s the investments that aren’t made that will slow growth in the short term.”