First it was rumors. The grapevine of talk from otherprivate equityassociates and friends from theBBwhere I did my banking stint. Of course, gossip is one thing we're all used to from our investment banking days and just like at our old jobs ,there was no shortage of juicy gossip. However, I brushed a lot of it off as standard ex-banker complaining. After all, everyone loves to complain in finance.
But then came the calls. Headhunters that I haven't talked to for a year were suddenly emailing me and calling me to "catch up". Was this a new hiring boom in a new vertical of finance? Unfortunately no, it was openPEpositions that were looking for laterals. Complaints of a saturated market and the inability to get deals done were no longer just harmless complaints from overworked associates. Apparently the rumors were true.PEassociates were leaving their jobs for business school, startups, hedge funds, corp dev, etc.
Theprivate equity(and any investment related industry in general) wasoversaturated. There was too much capital in the world. This may be hard to believe, but according to a very recentBain& Co. research report, total financial assets are nearly 10 times the value of global output of all goods and services. Let that sink in for a moment...
What's worse is that a major emerging market, China, which was thought to be an investment sink, is actually generating more capital than they are absorbing. What you will see by 2020 is the global world of capital turned upside down as there is too much capital and not enough attractive investment opportunities.
Now we can discuss the implications of this all day, but what does this mean for YOU, the junior member of theprivate equityor investment team? Well, not a whole lot except for the fact that you'll do more bitch work and less deal execution. However, isprivate equitystill a good place to be in the future? Is it still worth it to get that costlyMBAand return?
My answer is, yes, but with a caveat. One major problem with illiquid assets and too much capital is the inevitable creation and likelihood of bubbles. The housing bubble would be nothing compared to a future bubble as capital grows and the stakes get higher. And yes, maybe you can still make those great returns if you can find a bigger fool to buy it from you, but that is a reliance on the bubble and timing the market, which no good investor should rely on.
However, the same research report lists solutions around this capital saturation problem. One solution is toaimfor the long term. Game changers. Things like cheap renewable energy, nanotechnology and robotics. It's going to be harder and harder to achieve an attractive short term return (traditional 3-5 yearLBOmodel) so you really do need a platform that will last. Another solution is a focus on operations and real value add / expertise. Good management teams will be very important for realizing value. For most of you, this may be a great time to start a business and prove your worth.
Finally,emerging markets still holdample opportunity. Even though their financial systems often lack liquidity, depth and breadth, regulatory consistency and transparency, this "bottleneck" may eventually subside over the next few years and allow for new investment opportunities for literally billions of eager consumers.
Everyone hates change, but of course change is inevitable. I'm actually quite optimistic about the future ofprivate equityand consequently, the future of investors in general. We might be over the traditionalLBOmodels and financial engineeringof the past, but that's not necessarily a bad thing. With the death of the old comes a new era of operational improvement, entrepreneurial focus and of course, a truly global financial community as we shift our focus towards the emerging markets.
Comments (30)
Great post. Any chance you can share the Bain study on this?
Given you're a认证用户I think that's fine. PM me your email address and I'll send it over when I catch a breather at work :)
TheCertified Usercomment is bullshit.
You can just go to the following link to download it:
http://www.bain.com/publications/articles/global-private-equity-report-2012.aspx
So total financial assets are ~$700 Trillion? Is that right?
I would like to see that report as well. Wouldn't this be somewhat logical due to derivatives?
I'm struggling to see how you arrive at the conclusion that this directly relates to oversatuation ofPE. Thanks.
I'd have a hard time believing that the global output was anywhere close to financial assets. If that were the case, there would have to be no financial instruments (including loans, no savings, spend every dime you make but not a penny more, P/B ratios would all =1) and inflation would not exist! Whether 10 times output is high or low, I don't know...
We've heard ofprivate equitywith too much dry powder, are hedge funds facing a similar problem?
False. Hedge funds are tiny in comparison to other investment vehicles. Also, note thatHFshave a much broader set of investment opportunities thanPE.
http://imgur.com/xvZOO
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Agreed with above. Hedge funds have a different mandate, but in my opinion finding good investments in the future will be tough for any investor with alarge AUM.
Expenseaccounts: Apologies, I was forwarded the report along with a bunch of others as a bundle from our consultants so wasn't sure if it was public or not. For those that PM'd me though, I'll email it out since it saves you the hassle of having to register on that site.
Johnwayne: Arriving at the fact thatPE饱和是独立于任何报告说什么. I found it cool that someone else had arrived to the same conclusion but were using actual numbers / research through their day job of consulting.
Ask anyone working inPE,就不一样了。我大部分的祖父母ds at the larger shops are a bit jaded from their experiences as every deal is looked at and passed around by more and more people and there simply is a lack of attractive investments right now (moreso than before).
I also find it interesting that some of the changes are already happening as more funds are looking at smaller deals and "growth" type deals. I was able to participate in some LP calls and basically every large buyout fund is now interested in growth deals (according to these large FoFs).
But of course I only posted this as an opinion piece, feel free to disagree and discuss.
Edit: PS: Oh, and for those interested, the recent lawsuits against large buyout shops "colluding" on deals is also a pretty interesting indicator that there simply aren't enough good deals out there anymore.
I'm not inPEor evenIBDyet, but I am currently most interested in getting intoPEdown the road. I definitely see a lot of talk aboutPEnot being the same in the coming decades and I'm not really sure why.
Since global economic activity in general has slowed to a trickle, it would make sense to me that deal flow is down as well. Unless there is something systemic about the industry that I'm missing because I'm a no0b to the wholePEthing, I'm notreally sure whyPEwould be forever changing. Unless, of course, you think we are approaching a "new normal."
As for financial assets, my comments were mainly about the way they have ballooned in general. The fact that financial assets are so high would seem to suggest that we are coming up with shittons of leverage and creative new investment vehicles. Not necessarily disagreeing with you, just still don't see why that meansPEis constricted.
It's not a matter of increased leverage, actually deals nowadays have a lot more equity. As mentioned above, the main issue is dry powder and nowhere to put it. A lot of funds aren't finding deals that are surpass their hurdle rate given the risk attached. It's no fun to participate in an auction of 20 bidders when everyone is using the same valuation techniques.
PEhas always adapted in the past, theLBOboom may fade but something will definitely take it's place and hopefully that comes in the form of operational value add rather than just leverage and balance sheets.
As far as I'm aware, most of the returns today come from operational improvements and not just leverage. The days of financial alchemy ended in the 90s.
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Well when I mention leverage, I'm not talking aboutLBOor evenPE,我主要参考的宏观概念explosion of derivatives. This phenomenon would explain the 10x stat Bain used. Sorry if I'm not being clear.
Gotcha. Hopefully that link posted above works for everyone but if you'd like a copy of the report I can email you a copy so you skip the registration step.
Dontmakemeshortyou: Yep, agreed. Just misunderstood what Johnwayne was saying in his prior post. The bigger problem nowadays inPEfrom my experience is the ultra-competitive auctions for any deals we have liked so far. My fingers are crossed for a proprietary deal this year....
great topic. agree w/ observation re: more $ chasing deals/opportunities (actually esp. so in EM). however struggling to see the basis for your optimism re:PE/investing. care to elaborate?
Well, I think it's pretty safe to say there will always be good companies out there that require expertise/balance sheet/network value add and in that respect,PEwill always be a strong industry. My optimism, however, stems more from my own experience. My firm is very operationally / product focused and it's been incredibly rewarding to work on product strategy in new markets rather than wasting our time participating in competitive auctions. We have a lean team so this has freed up a lot of time to look at a new vertical and a new market that was recently mandated.
Also the case inMM... time to find a new frontier?
this is actually a very interesting topic. Have had the opportunity to talk to quite a few GPs recently as I do my networking rounds, and everyone seems to have a tough time fundraising. However, the data I've seen indicates that after the excess capital is worked off (through investment period extensions), or just returned to LPs, the amount of capital available for deployment should stabilize. This means that returns should pick over the medium term, as PE's returns are very counter-cyclically related to the amount of capital available for deployment (as a % of totalmarket cap for example).
Sanity's comments regarding the operational value add, value added from having a specialization (FIG, healthcare, manuf. etc.), and proprietary sourcing are also right on. These factors, coupled with track records and somewhat favorable LP terms is what is needed to raise a fund successfully. I also think that these new strategies create greater opportunities inPE, as more operational / management focused resources are needed for a successfulPEfirm - this could be a very interesting career for the younger folk who are looking to build a career going forward. EM is also interesting, but I think that given the capital available, and the more relationship based nature of business, these markets will be hard to penetrate unless you have local connections.
Currently inMBAright now, so i am actually looking forward to being in the field if I can get back in. I think that over the medium term as excess talent is bled off, there will be more opportunity to work on interesting things inPEvs. just financial engineering. Hopefully this translates into a more intellectually stimulating career long term (although I suspect that you will still be relatively restricted into a deal role if you're at a larger firm that separates operational and investment teams).
MMand LowerMMall the way...our fund is busier than it has ever been. I read a report recently saying that while overall deal activity was down, nearly 70% of the deals done in 1H 2012 occurred in the middle market (broadly defined as $25m - 1b deals). There has been a corresponding decrease in multiples paid and leverage available (esp. w/more restrictive covenants), but the fact is that deals are still getting done.
Echoing Discrete above, the fundraising environment is interesting right now...our current fund is an SBIC fund and we're trying to decide (by we I mean the GPs) whether to go that route for the next one.
For the uninitiated: SBIC funding allows your fund to have "built in leverage" so you can close (usually) w/o 3rd party financing contingencies.
"Wa wa we wah." -Borat
Thanks for opening up this discussion. Do you think largePEfirms can go global to the extent comparable to that ofinvestment banks? ?我知道有世界各地的办事处,but the total assets deployed in other countries does not seem to be that large currently. I'm wondering if this can change at some point...
This is all my opinion but in the near-term I think it will be tougher. It's hard to be good at EVERYTHING compared to focusing not only on one country but also on a few verticals. In the example of China, the big funds are all doing pretty horribly (Carlyle Asia, TPG, etc.) But the local players are doing pretty well and have the local expertise and network to get good deals done.
If you're a LP, you'd rather go with the locals but the effects of this is different when the regions/cultures are similar. Europe/US shops usually do pretty well but it takes more than abalance sheetto get it done in India/China/Brazil/Russia.
I agree, but I think the reasons Carlyle Asia, TPG, and other mega buyout funds are struggling overseas is due to spreading too thin and wide. In addition to global expansion all the big firms seem to be turning to alternative asset managers. The locals are all operating like boutique buyout firms and can stay focused.
PEis facing other problems as well. One of which is LPs playing it tough (i.e CalPers) and lowering both the management fee (1%) andcarry(below 20%) they are willing to pay.
HFsare also having trouble, although it is not to the same extent asPE. It is no coincidence that you always heard about 30% returns in the 90s, and 20% in the 00s. Now 10% is a great year. Many strategies (and specific names/trades) feel very crowded.
Yup. Oaktree targeting 15%IRRon new distressed fund vs. historical performance well over 20%. It's getting tough out there.
http://www.bloomberg.com/news/2012-12-04/oaktree-s-15-returns-target-is-lowest-ever-marks-says.html
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