October 2016 Issue
As rebounds go, the escalation in global private equity (PE) deal flow in Q2 2016 compared to its immediate predecessor – a 77 percent increase in deal activity no less – is an impressive spectacle indeed.
Christopher Elvin, head of private equity products at Preqin, partly attributes the pick-up in deal value in Q2 to the rise in the number of deals valued at $1bn or more. “Twenty-four deals with an aggregate deal value of $51.5bn were completed or announced in Q2 2016, compared to 11 deals with an aggregate value of $29.2bn in Q1 2016,” he confirms.
This turnaround, showcased within the pages of Preqin’s Q2 2016 ‘Private Equity Buyout, Deals and Exits’ update, saw PE deal value jump overall from a relatively disappointing $50bn in Q1 to $89bn in Q2 – progressive, though still someway adrift of the $102bn accumulated during Q1 2015.
Comparisons aside, the uptick in deals announced in Q2 2016 still represents a marked improvement in the PE arena, and has led to fevered speculation by industry practitioners that fund managers are now reverting to the pricing and competition levels seen throughout 2015.
PE rising
According to John Taylor, a partner at Herbert Smith Freehills LLP, a further factor behind the rise in PE activity levels is continuation of a secular shift by investors into PE and other alternatives, a trend that has given funds significant volumes of dry powder.
“At the same time, banks are still relatively keen to lend, so asset valuations have tended to remain high,” explains Mr Taylor. “We may see, in the UK and Europe at least, asset values tailing off in response to the Brexit referendum, the consequent drop in the value of sterling and general nervousness about economic stability in the wake of the referendum.”
Referendum impact
The outcome of the EU referendum may well have a detrimental impact on PE activity going forward, with the response of investors being a particular cause for concern across the industry. “Uncertainty did depress activity, especially shortly before and immediately after the vote, as an initial sense of shock set in,” recalls Mr Taylor. “In the short term, the PE response will depend largely on which sector is involved. The reduced value of the pound may make UK valuations more attractive and boost exporters more generally.
“The outcome of the EU referendum may well have a detrimental impact on PE activity going forward.”
“Longer term, a lot will depend on the terms of the UK’s future negotiations – nobody knows whether, for example, funds will retain the right to market to European investors or more generally whether UK exporters will be faced with new barriers to trading with the EU and the rest of the world,” he adds.
To help determine the potential impact of the referendum on future PE investment activity in the UK and EU, Preqin conducted surveys of both fund managers and investors following the Brexit decision. The results indicated that PE investments in the short-term are likely to be muted, with 43 percent of the investors surveyed saying they will invest less in the UK in the next 12 months as a result of the Brexit decision. However, 60 percent stated that they anticipated making no change to the number of investments in the long-term. Furthermore, in terms of the EU, 8 percent of fund managers said they expect to make fewer investments in the region over the next 12 months, while 15 percent anticipated making more investments.
PE deal flow in H2 2016
Although fund managers and investors are likely to proceed with caution, owing to the volatility that currently pervades the political and financial arenas, the outlook remains bright.
“Private equity is coming off a period of strong activity, and as a result, LPs and GPs remain committed to the asset class and we expect to see robust PE activity in the final two quarters of 2016,” says Mr Elvin. He adds that PE dry powder levels are at an all-time high, and if public markets were to weaken, it is likely we will start to see an increase in deal activity as fund managers look to deploy some of this capital and take advantage of lower entry prices for assets.
Mr Taylor also expects to see an uptick in the pace of dealmaking in the final two quarters of 2016. “Funds with cash will be keen to take advantage of any transient post-Brexit opportunities, and a proportion of the deals that went on hold in the run-up to the referendum are likely to re-start,” he suggests.
Strong appetite
Clearly, H1 2016 has seen a remarkable turnaround in the fortunes of PE deal flow, with activity exceeding its 2015 equivalent. Moreover, H2 2016 is likely to follow suit.
In August 2016, Preqin surveyed 187 PE fund managers and found that a further escalation in global PE-backed deal activity is expected across the industry. Attention is now focused on investors and their appetite for the PE asset class over the coming year and beyond.
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Fraser Tennant