Private equity


Financier Worldwide Magazine

March 2017 Issue

March 2017 Issue

Private equity (PE) has seldom looked as positive, with a distinct sense of optimism surrounding PE funds and deal flow. Fund managers have taken advantage of a favourable exit environment to distribute record levels of capital back to their investors. They are armed with a vast supply of dry powder and fundraising remains strong. Despite global economic and political uncertainty, the outlook for PE in 2017 is of an industry continuing to evolve and adapt to meet diverse investor needs.

FW: Reflecting on the last 12-18 months, what have been the most significant trends defining the private equity (PE) industry? Under current market conditions, what are PE practitioners seeking from their investments?

Lindae: PE in developed economies has seen significant exit activity due to attractive valuations, as well as a general increase in allocations by family offices and institutional investors into PE. In part, the latter could be due to a rotation of capital out of hedge fund strategies and into PE strategies. Major pension fund schemes have been shutting down their hedge fund exposure, for example, CALPERS in the US and PPGM in Europe. Due to the attractive performance in the last four years in equity, both listed and private, substantial money has flowed into these asset classes. The result of this need to recycle distributions, and an increased allocation exposure, is a shift in bargaining power from limited partners (LPs) to general partners (GPs). PE in emerging economies has experienced the exact opposite, reduced allocations by LPs, lack of exits and local currency devaluation, resulting in a dearth of demand from LPs and increased bargaining power of LPs over GPs.

Alsina: Over the last 18 months we have seen a number of different trends. The first one is that PE assets are increasing by double-digit percentages as there have been very substantial distributions to investors. We believe that moving forward the large pension funds, as well as institutional investors, will tend to allocate more capital to PE investments. In Africa, we are seeing a proliferation of secondary sales as a means of an alternative exit route, and a stronger appetite from multinational companies to enter the continent as the rise of the middle class, with increased incomes, rapid urbanisation and improvement of regional infrastructure, is combining to offer businesses new opportunities. A further trend we are seeing is that, finally, the days of buying low and selling high are over. Nowadays, only those PE firms that are able to define and implement a clear and strong value creation model, and make it work for the portfolio company, will win in the marketplace.

Bartell: The past 12 months has seen an increase in the number of LPs looking to invest directly, thereby bypassing GPs. There has also been an increase in fundless sponsors, as well as a greater degree of transparency due to ever more stringent regulations. The PE industry has also witnessed a record year for capital allocated to funds, both from new investors and current investors increasing their investment. Traditional buyout funds have been pursuing more technology-sector investing, such as late-stage investing, and the appetite has increased for minority, non-control investments. Furthermore, pricing has been attractive for sellers, and with capital overhang pressuring GPs into putting their money to work, prices could potentially be pushed higher.

Elvin: The PE industry has been going through a very strong phase in recent years. Fund managers have been distributing record levels of capital back to their investors, taking advantage of a favourable exit environment. This has driven high levels of investor satisfaction, which has, in turn, helped to drive near-record levels of fundraising for the asset class. However, this strong fundraising, in conjunction with the growth of the asset class, has led to dry powder levels rising and has increased competition for assets.

Abelow: The pricing environment has compelled a renewed focus on add-on acquisitions within portfolios. The tremendous growth of credit-oriented strategies among alternative asset managers has accelerated the replacement of traditional banks by direct lenders in the middle markets – and we do not believe that changes in Washington will likely reverse this trend in a material way in the near term. Also, the growth of longer-dated private equity firms threatens to create a whole new class of buyers in the upper middle market.

The overall level of PE-backed buyout deal activity was very strong in 2016, with around 4000 deals completed worldwide; however, aggregate deal value was substantially lower than in recent years.
— Christopher Elvin

FW: Could you provide an insight into the major challenges currently facing fund managers?

Elvin: Valuations for assets emerged as the biggest concern for fund managers in 2017, according to our most recent survey in December 2016. Almost half of GPs said they were facing more competition for deals compared to a year ago, and the majority intend to deploy more capital in 2017 than they did in 2016. Beyond this, the largest proportions of fund managers cited the exit environment and ongoing market volatility and uncertainty as their biggest challenges in the year ahead. The latter concern is particularly prevalent among Europe-based GPs. With the UK due to begin Brexit negotiations with the EU, and several major European elections scheduled, it is perhaps unsurprising that fund managers in the region are concerned with navigating the market over the next 12 months.

Alsina: The major challenge for fund managers operating in the emerging markets is the ability to help LPs understand the difference between the real risks and the perceived risks of these geographies. Additionally, matching the liquidity events with their fund’s lifespan is critical and, at the same time, extremely challenging, particularly in emerging markets. Liquidity events could be highly volatile as they depend on the currency. For example, imagine a company that is consistently delivering double digit growth and has great growth prospects, but suddenly there is devaluation in the local currency. In the range of 30 to 50 percent, this devaluation is a major uphill battle. If it takes place at the beginning of the investment, it can be managed. However, if it happens during the last years of the fund’s existence, a value issue will force the fund manager to retain the asset until the value has been recovered or to divest with losses or lower plus values.

Bartell: Regulation is one of the major challenges currently facing PE fund managers, with investor and management reporting and demands for transparency on fair value particularly stringent. Fund managers are also wrestling with the challenges posed by succession planning and the methods that should be used to groom the next generation of PE practitioners. Additionally, difficulty has been noted in raising funds if the fund concerned is a generalist, and not dedicated to one industry sector, such as healthcare, technology, consumer products, energy and distribution. Other issues include competition over lower deal volumes and higher valuations, and the threat posed by cyber attacks and anti-money laundering (AML).

Abelow: Over the past year, fund managers have been confronting the triple threats of price, price and price, as market competition has driven EBITDA multiples for even low-growth businesses well into the double digits. Every other issue pales in comparison to this, which poses a threat to the return expectations of all funds still operating in a business-as-usual mode.

Lindae: Regarding emerging markets, there has been significant reduction in fundraising achieved by most GPs, both in re-up demand and new allocations as the allocations to emerging markets have fallen. There was a 45 percent drop in commitments in 2016 compared to 2015. Many smaller fund managers are failing to launch as first close ambitions are not materialising. This fundraising landscape is further accentuated in certain geographies, such as Russia, Ukraine, Brazil and India. A lack of exits, and the depreciation of the Rupee has not generated attractive hard currency IRR alpha in India.

FW: Which sectors and industries seem to be attracting significant investment? In which regions are PE practitioners focusing their attention?

Bartell: The technology, healthcare and consumer products and services industries have been particularly active in terms of investment recently, with the US and the rest of the Americas recording high PE deal value. In terms of dry powder, the PE industry is continuing to build significant capital that is ready to be deployed.

Elvin: The overall level of PE-backed buyout deal activity was very strong in 2016, with around 4000 deals completed worldwide; however, aggregate deal value was substantially lower than in recent years. In keeping with the last few years, industrial deals were the most commonplace, but information technology deals accounted for 30 percent of the $319bn spent through the year, the largest proportion. This trend looks likely to continue into 2017; the number of technology-focused funds is growing, and firms such as Thoma Bravo and Vista Equity Partners both closed multi-billion dollar funds focused on the sector in 2016, which are likely to be making major investments in the months ahead. In terms of regions, North America remains the dominant market for PE deals, seeing over $190bn worth of investment in 2016 – some way down from the quarter of a trillion dollars spent in the region in 2015, but still around 60 percent of the global total. Spending in Europe has remained relatively steady in recent years, at around $90bn annually. Conversely, the total value of deals in Asia halved from 2015 to 2016, following two consecutive record years for investment in the region.

Lindae: If one includes VC as a sub-asset class in PE, it is clear that over the last 24 months VC has outperformed other categories, such as LBO, growth equity and distressed. Given the herd mentality of institutional investors, you see this attracting an increase in investment demand for VC. FinTech has probably been the leader in attracting, at least on a percentage basis, a significant year to year increase in capital committed and invested. Regarding regions, Southeast Asia continues to see investment demand, as well as Africa, to the point where one has to consider a resulting underperformance in near-term vintages if their economies do not deliver continued strong results.

Abelow: It was not too long ago that we spoke excitedly about the globalisation of US private equity. Every US multi-strat player worth his cufflinks did a tour in London, Hong Kong or Sao Paolo. While those firms are still active abroad, we have now seen that the tide can flow both ways, with successful large and now even mid-market European firms developing substantial businesses in the US. Firms like Permira, BC, CVC, PAI, Bridgepoint and others have opened or grown outposts in New York, attracted by an economy which might be poised to post growth far in excess of what they will see in their home markets. Those sectors which are particularly likely to benefit from regulatory rollback – and which are not too tethered to an economic cycle which seems increasingly long in the tooth – are the darlings of the moment.

Alsina: In Africa, the emergence of positive demographics, the growing consumer classes, and rapid urbanisation and industrialisation is creating interesting investment opportunities across a wide range of sectors. There are a number of interesting areas, most notably, education and the health sector, as well as fast moving consumer goods, finance and industrial projects. Overall, we are seeing very good opportunities across many sectors. Nevertheless, the challenge is to be able to identify the company that is best positioned to be successful in the future and to outperform the market. In terms of geographies, Africa is showing great potential for PE firms. However, we are talking about 54 different countries, with very different realities. Acknowledging that and working in those terms, without trying to apply the same formula everywhere, is crucial to being successful.

AIFM legislations are impacting the industry, particularly for European GPs and investors. However, as the industry is well structured, we do not foresee any issues going forward.
— Albert Alsina

FW: In terms of target sourcing, what general approach are firms taking to select the best deals that stand to deliver superior returns?

Abelow: Savvy funds are trying to avoid being just another auction participant. More and more funds are taking steps to pre-empt early stage processes, which requires them to have gotten conviction early through deep industry dives, early-look meetings, and so on. Old structural verities are less certain than they once were, too, with more funds willing to look at minority investments, for instance, or agree to longer hold periods than was traditional in the industry.

Alsina: Each PE firm has its own approach. One model, for example, is based on a number of key metrics that help accelerate the investment decision process, evaluating the potential company on a number of specific business and financial aspects that are essential for the right implementation of a creative value model.

Lindae: Information dissemination asymmetry in emerging markets is always quite high, so the risk of adverse selection should be at the forefront of a PE investor’s mind. For this reason, a deep network and the resulting strong local market intelligence is paramount. Typically, a lot of emerging market PE is mid- to lower mid-market growth equity where the target is owned and managed by the founder. Sourcing the best deals requires considerable time gaining the sponsors’ trust and convincing them you can deliver on your promise to create value and be a good partner. Of course, this is the case in all PE markets, but in emerging markets, this is particularly true as the PE ecosystems are less developed and the entrepreneurs are not as knowledgeable about the risk and rewards from working with a PE fund manager.

Bartell: Firms have been utilising data analysis and technology methodologies to confirm a clear path and create an inventory of actionable acquisition candidates. This includes identifying logical merger partners with competing PE firms and carrying out appropriate due diligence that focuses on risk management, operations, valuation and performance reporting. Firms are also continuing to add dedicated business development professionals to their payroll, with narrow sector expertise that creates competitive advantages being favoured.

FW: Have any recent, high-profile PE deals attracted your attention? What specific aspects of these deals are worth highlighting?

Elvin: What is certainly striking is the nature of some of the biggest exits PE firms made in 2016. Of the 10 largest, eight were trade sales and two were sales to other GPs – including the $7.5bn sale of MultiPlan, Inc. from a consortium including Ardian to another consortium including Leonard Green. Altogether, a third of the companies that PE firms exited in 2016 were acquired by another PE investor, accounting for a quarter of the total exit value seen through the year.

Lindae: We recently closed a buyout transaction in Pakistan, Engro Foods. This is one of the largest, if not the largest, FDI made in Pakistan. Investing in Pakistan has many challenges, but part of our mandate is to take on this type of country risk. To mitigate some of these exogenous risk factors, currency, inflation, war, political instability, considerable time and effort went into the deal structure. However, in the end, there is always a risk of over-engineering a deal as unexpected perverse outcomes can always be the result.

Abelow: I think one of the most interesting deals we have seen lately was the sale of CAPS to Silver Lake portfolio company Cast and Crew. It was surprising that the deal did not get more press at the time – it returned more to its sponsor Verus than the entire size of Verus’s fund. It was really a classic case study for how to add value in the middle market, enhancing the management team, targeting adjacencies to increase addressable market size, developing new technologies and then finding an investment banker to tell that complex story in a way that highlighted that the company was a must-have for its competitors. The deal was proof that while large cap deals and funds often get the attention, some of the players in the lower middle market can be exceptionally nimble and effective.

The growth and normalisation of the secondary market has profoundly impacted the relationship between LPs and GPs, with the former no longer bound for life to the latter.
— Justin Abelow

FW: In what ways are legal and regulatory developments shaping the PE industry? In your opinion, how will compliance requirements impact the asset class in the long term? Are some PE firms struggling to adapt to profound regulatory change?

Abelow: Upcoming changes in Washington may provide a respite for industry players concerned about encroaching regulation, but that breather is likely to be temporary at best. History is not overburdened with examples of regulation decreasing over time. On the positive side, it is unlikely that much of the industry will prove unable to cope with increased compliance costs. Most sophisticated players have rapidly put in place additional processes – third-party valuation providers, clearly codified policies on expense allocation, consulting, co-investments and so on – to address increased compliance burdens and will continue to do so. It is market risk, not regulatory risk, which will trouble the industry most.

Lindae: As countries have many regulatory and tax regimes which are always subject to change, it is difficult to see a general thematic trend. In Europe, the Alternative Investment Fund Managers Directive (AIFMD) has presented challenges to smaller fund managers, as the cost to abide by increasing regulatory requirements always burdens the operations on the primary goal of providing superior returns to public equity. Of course, moral hazards from loose regulations impose their own cost on the industry.

Elvin: The proportion of investors we surveyed that have indicated regulation is a key challenge facing the PE industry increased from 21 percent at the end of 2015, to 25 percent as of the end of 2016. With uncertainty still surrounding the implementation of various reforms including AIFMD, Solvency II, Dodd-Frank and Basel III in recent years, the impact on investor allocations is yet to be seen. This has been further complicated by the presidency of Donald Trump who pledged to “dismantle” Dodd-Frank in his campaign, which is likely to create further uncertainty among market participants. Another survey on the worries surrounding AIFMD that we conducted in 2016, found that over a third of fund managers were primarily concerned with the cost of compliance. Moreover, 22 percent and 14 percent of respondents stated that increasing complexity in the market and risks arising from a lack of guidance respectively, were their primary concerns. Nonetheless, investor appetite does not seem to have been dampened by current regulation or prospective regulatory changes, and fund managers stand in good stead for another successful year of fundraising.

Bartell: Regulatory and compliance requirements have been causing considerable uncertainty and are viewed as a major challenge for all private fund managers and private equity firms. Certainly, the proposed taxation on GPs’ carried interest may well force firms to sell portfolio companies in 2017 and 2018. Elsewhere, the regulatory and compliance aspect of the Securities and Exchange Commission (SEC) has not changed substantively as far as PE firms are concerned. However, this may change should a new SEC chair be appointed to implement a new agenda. That said, the SEC is continuing to focus on issues such as fee and expense allocation, valuation and co-investment vehicles. Globally, regulations such as the AFMD in Europe will have an impact on fundraising throughout the PE industry. Another development is the change to regulation in Brazil, with all funds having to publicly disclose the fair value of each of their investments once a year. Some of these changes will have ripple effects, while others have an as yet unknown impact.

Alsina: AIFM legislations are impacting the industry, particularly for European GPs and investors. However, as the industry is well structured, we do not foresee any issues going forward.

FW: To what extent has the relationship between GPs and LPs evolved over the past few years? How has this evolution affected the fundraising process and the general management of funds?

Lindae: This relationship hinges on funding cycles – business cycles, liquidity and PE return performance, premium to public equity. In the end, it is all about relative bargaining power at the negotiating table discussing terms on transparency, alignment, protection and the commercial structure – how economics are shared based on priority and percentage. You see this dynamic across vintage years superimposed onto the economic conditions of that period. 2004 to 2007 resulted in more GP friendly terms which swung back in favour of LPs after the financial crisis. You can also see some of this in the evolution of ILPA guidelines, 1.0, to 2.0 and current discussions on 3.0. There is more GP push back currently in developed markets.

Elvin: Satisfaction is high among PE investors: the vast majority of institutional investors we surveyed in November 2016, 84 percent, hold a positive view of the asset class, with sentiment buoyed by recent positive performance. Scrutiny of fees continues to be a hot topic within PE; while our recent LP survey results show that there has been a change over the last 12 months, substantial proportions of LPs feel further improvement is needed to management and performance fees. However, investors remain attracted to PE and continue to plan further investment – 40 percent of investors intend to commit more to the industry over the next 12 months than in the previous year, while 48 percent want to increase their allocation over the long term. The only obstacle could be finding a home for this capital, as the most in-demand managers often find their funds oversubscribed, while the continued rate of distributions means that investors have increasing sums of capital that they are keen to reinvest.

Bartell: LPs have demanded increased transparency, particularly around the cost of investing – not just as far as lowering fees is concerned, but also in terms of providing co-investment opportunities. The result is that it creates another layer of regulatory scrutiny as to the fairness of co-investment allocations to LPs. Another significant development is the increase in diligence by LPs surrounding the robustness of GPs’ back office operations and the management of operational risk. This demand for data by GPs incurs costs, and the question is how these costs will be transferred, in addition to how the data will be captured and transmitted. In many ways this is a growing service; a demonstration of how GPs create value in their portfolio companies, demand the opportunity to co-invest and have right of first refusal on portfolio company exits.

Alsina: In the last few years we have started to see a strengthening of the relationship between GPs and LPs. Instead of going into a concentration exercise, as many called it, nowadays LPs tend to reach out to GPs as PE allocations are increasing, especially within pension funds and institutional investors. For LPs, being able to show a clear strategy and to prove that their value creation model is working, as well as operating in the top quartile of performance on a consistent basis, is becoming more and more relevant every day.

Abelow: The growth and normalisation of the secondary market has profoundly impacted the relationship between LPs and GPs, with the former no longer bound for life to the latter. Equally consequential is the emergence of the relative handful of large and sophisticated LPs seeking to disintermediate their erstwhile partners by going direct. The success of these programmes has been wildly divergent, with many failing but some showing signs of success.

Distributions are driving the need to recycle funds, while at the same time the desire by many market participants to increase their portfolio allocation into PE continues.
— Gregory Lindae

FW: How would you characterise the issues surrounding monitoring and transaction fees, among others? Are there signs that such fess will be eliminated, reduced or rethought?

Alsina: We believe the industry is properly positioned to maintain stability on fees. A reduction in fees would basically drive the mid-cap and the small-cap teams toward the large-cap markets, where economies of scale make the segment more attractive. In our view, fees are not an issue if the GP is capable of delivering good returns.

Bartell: SEC guidance, recent exam priorities and focus in the context of examinations for private equity firms always includes fee and expense allocation. The SEC seems to view this as the riskiest area for PE firms. In terms of accelerated monitoring fees, the SEC is sensitive to fees paid to investment advisers for services never rendered. There have been two recent SEC enforcement actions that involved a failure to properly disclose accelerated monitoring fees to investors prior to such investors’ capital commitments. The SEC is also sensitive to fees charged to clients in connection with securities transactions. Some PE firms charge such transaction-based compensation to clients without registering as broker-dealers.

Abelow: These different types of fees are not exactly created equal, with transaction fees subject in some jurisdictions to quite different regulatory scrutiny than monitoring fees. Some recent data suggests that both are being rethought to some extent now, but we have all seen this before. With asymmetrical bargaining power, strong markets benefit GPs a fair amount, and weak markets benefit LPs only a little.

Lindae: In emerging markets, one sees transaction fees, even if the deal is aborted, taken on by the fund and not the fund manager. There is a push to be more aligned to developed markets, and we do see abort fee caps. In general, since the SEC charged Apollo in 2016 for disclosure and supervisory failures regarding monitoring fees this topic has been on the table in the industry. I think in emerging market PE the risk of these conflicts is likely to be higher.

FW: In your opinion, what are the main risks that PE funds need to be aware of in today’s market? How can such risks be mitigated amid current challenges?

Bartell: In light of increased SEC scrutiny, PE firms should pay close attention to their valuation practices. They should also ensure they have robust standalone valuation policies and procedures, establish a valuation committee, and conduct independent valuation testing in order to mitigate the risk of misleading or incorrect valuations. The SEC is also keenly focused on the usage of co-investment vehicles and inherent conflicts of interest associated with the allocation of investment opportunities.

Elvin: The trend toward a greater concentration of capital among fewer funds continued in 2016; 12 percent fewer funds closed than in 2015, resulting in the average fund size increasing to $471m, an all-time high. Investors are committing more capital to a smaller number of proven and well-known GPs and consequently first-time firms and those smaller, less experienced managers may struggle in their fundraising efforts. Another concern for industry participants will be rising valuations and the impact this may have on future returns. This is a very real issue, however common it is to most asset classes today. Despite this, provided PE can continue to deliver good returns to investors through the cycle, then the industry is well positioned for further growth.

Lindae: Distributions are driving the need to recycle funds, while at the same time the desire by many market participants to increase their portfolio allocation into PE continues. The result of these forces is a risk that the flow of capital will drive down returns, while simultaneously reducing the quality of a fund manager’s portfolio. Managers under pressure to deploy capital are more prone to suffer from a drift in their investment discipline when higher quality deals are snatched by competitors. Beyond this, the potentially negative impact of the new US president and his administration on global trade and geopolitical stability is disconcerting. The public equity markets in the US have responded positively to his desire to cut regulation and corporate taxes. Although research has suggested that the correlation between tax rates and corporate profits, let alone the casual relationship, appears minimal. The question is whether the neo-mercantilism spawned by the recent fervour around nationalism will be sufficient to throttle globalisation. Trade restrictions and barriers to a cross-border flow of human talent, coupled with uncertainty on a daily basis from shocks to current international political equilibriums, can easily lead to a net negative outcome.

Abelow: The biggest procedural risk to buyers today is that strong markets have enabled investment bankers to tighten the timeframe under which investment decisions must be made. The growth of sellside due diligence packages, which are somewhat different in the US from the European vendor due diligence norms, has mitigated this somewhat, and many buying sponsors are redoubling their efforts to import additional resources – buyside banking, consulting and operating – to offset the crunch.

Alsina: There are four risks to be aware of. First, long-term commitment is a fundamental requirement of investing in PE, which is often underestimated. This class of asset requires long-term commitment in order to allow fund managers enough time to create value in the portfolio. Second, liquidity risk. Due to the lack of a dedicated market place or a dynamic secondary market, investors in PE are naturally exposed to liquidity risk. We are attempting to offset liquidity risk by focusing on the exit strategy even before investing in a particular company. The key question we must be able to answer before investing is “do we have a clear exit strategy?” In that sense, for us, reaching an agreement with shareholders upon a priority exit route is a key condition of each investment. Third, returns. As in any asset class, an investment in PE bears risks that should be compensated for by adequate returns. However, LPs can still face the possibility of delivering below-expectations returns.  A focus on value creation and the ability to execute exits are crucial requisites to ensure LPs get expected returns. Finally, style drift. LPs may fear the risk of a significant change in the purpose of the fund, in terms of scope and investment policy. Keeping the investment strategy and focus of the firm stable over time is critical.

Given the emerging momentum in the IPO market, greater availability of buyout debt financing and seller motivation to reap the gains of the expected tax cuts, the outlook for the PE market appears quite positive.
— Robert A. Bartell

FW: What overall advice would you offer to fund managers looking to deploy capital and nurture portfolio companies to ensure maximum value creation and deliver top-tier value for their investors?

Abelow: Specialisation and differentiation is key, whether by industry sector, geography, operational toolkit, or otherwise. Many generalist firms will continue to thrive, but only if they are, in effect, confederations or aggregations of specialists.

Alsina: It is most important to seek the right deals. Do not be opportunistic. Ensure that you can create value from day one. Be able to differentiate between a good company and a good investment. Continue to nurture your relationship with your investors and shareholders. And finally, focus on execution in all that you do, from seeking opportunities and evaluating potential investments, to working closely with management in order to generate value in portfolio companies, while looking for the best moment to exit.

Lindae: Stick to your strategy. It is better to have lower returns or fail to deploy capital than to lose it. Beyond this, if your strategy is focused on more traditional brick and mortar business, with heavy balance sheets, large capex and leverage, keep a keen eye on the impact of disruptive business models afforded by current technological advances. Avoid your own ‘Kodak moment’; the threat of new entrants can shift very rapidly. In retail, one sees the impact of disruption when comparing companies like Sears, Kmart, BestBuy and Target to Amazon since 2006. Even when you peel away the economics of Amazon Web Services, e-commerce is crushing it. In the emerging markets you have bifurcation between more traditional businesses, like F&B, FMCG, manufacturing and innovative businesses, either copycats or leapfrogs, such as FinTech mobile payment platforms in Africa.

Bartell: Fund managers must show how alpha was created – deal sourcing, industry expertise, price negotiating, operational changes and bolt-ons. It is also important to attract senior level management that has historically been averse to the mid-market and private company arena.

FW: How do you envisage the outlook for the PE market throughout 2017? How is deal flow, for example, likely to compare to previous years?

Alsina: The outlook for 2017 is very encouraging. Deal flow is stronger than ever and is going to increase. Developments in African economies are setting the right path for PE. The future looks bright.

Lindae: Generally, given the events of the first few months of 2017, we would expect interest rates to gradually rise, the dollar to further strengthen over the euro and the pound and international trade to slacken, with likely protectionism flaring up between Mexico and the US. These events will not be beneficial to PE. For now, valuation and exit opportunities are still attractive, but emerging markets will remain challenged as capital outflow continues in these countries.

Abelow: Middle market deal flow remains near peak levels, while larger cap flow remains more variable and harder to predict with confidence. Interestingly, the end of 2016 saw some sellers looking to accelerate transactions and some looking to slow them down, depending on their respective tax postures. On a net basis it does not appear that there was a material ‘pull-forward’ effect, as we have seen in recent years where the market anticipated tax changes. At any rate, if tax changes become more concrete, the efficient frontier for the sale of family and closely-held businesses will inexorably shift, which will be friendly for deal flow. Most of the remaining deal-flow friendly factors impacting the market over the past few years, including the vast inventory of PE-owned businesses and the large and growing pile of PE dry powder, continue unabated.

Bartell: Given the emerging momentum in the IPO market, greater availability of buyout debt financing and seller motivation to reap the gains of the expected tax cuts, the outlook for the PE market appears quite positive. Proposed changes in the taxes of GP carried interest are also expected to increase the volume of exits and expedite realisations to take advantage of the robust capital markets, strong economy and favourable environment. The changing regulatory winds from the SEC and Trump administration could prove significant – favourable or negative. Overall, there is optimism surrounding deal flow, due to the possibility of lower regulatory hurdles and tax reform, uncertainty over the impact of trade barriers and the sustainability of the lending environment.

Elvin: The PE industry is seeing great success and growth at present; few in the industry would bet against another positive year with fund managers and investors both signalling sustained appetite for the asset class. Our survey results show that 54 percent of GPs are looking to deploy more capital in 2017 than they did in 2016. Combined with recent strong fundraising, and the fact that fund managers are armed with record levels of dry powder, 2017 could mark another bumper year for PE-backed buyout and venture capital deal flow. Furthermore, investors have been boosted by strong industry performance and record levels of distributions, and fundraising looks set to continue its momentum. In 2017, the UK looks set to trigger Article 50 to initiate its departure from the European Union, Donald Trump has become president in the US and there are several key elections in Europe. As a result, public markets may experience some turbulence, but the PE market will hope to prove its worth during these times, protecting its investors and continuing to deliver stable returns. Certainly, fund managers will believe that they are in a strong position to weather whatever economic conditions lie ahead. The PE industry has seldom looked as positive as it does in early 2017, and its track record suggests that the market will continue to evolve and adapt to meet the needs of its investors.


Robert A. Bartell joined Duff & Phelps in 1997 and is currently head of corporate finance, after previously serving as the co-head of the Transactions Opinions group and Chicago office city leader. Mr Bartell has approximately 20 years of experience in corporate finance engagements, including mergers and acquisitions advisory, fairness and solvency opinions, financial restructuring, portfolio valuation, ESOPs, management equity compensation plans and shareholder disputes. He can be contacted on +1 (312) 697 4654 or by email:

Gregory Lindae is a senior investment officer at FMO, currently the team leader covering Asia and ECA/CIS for co-investments and directs. FMO focuses exclusively on PE in emerging markets. Mr Lindae has been an investment professional in PE and VC for over 20 years as a principal investor. Prior to FMO, Mr Lindae focused on the US markets, spending more than half of his career in VC in San Francisco. He can be contacted on +31 64 681 6905 or by email:

Justin Abelow is a managing director in Houlihan Lokey’s financial sponsors group and is co-head of the firm’s private equity practice, focusing on private equity coverage in the US and Europe. He is also a member of Houlihan Lokey’s management committee. Mr Abelow joined the firm in 2001 and is based in the New York office. He can be contacted on +1 (212) 497 4206 or by email:

Albert Alsina has more than 20 years of international experience in multinational settings, including more than 10 years’ experience at a global and European level. He joined the banking group Riva y García in 2008 and, in 2013, founded Mediterrania Capital Partners which manages two funds Mediterrania Capital I (MC I) and Mediterrania Capital II (MC II). Mr Alsina is a member of the Investment Committee of MC I and MC II and a board member of several portfolio companies of both funds.

Christopher Elvin joined Preqin in 2006, and is currently head of private equity products and responsible for Preqin’s market leading online products and solutions. Having spent many years in senior positions across the sales team, he is now in charge of defining Preqin’s strategic direction in the private equity industry, both through innovations to online products as well as through research and communications strategy in this space. He can be contacted on +44 (0)20 3207 0256 or by email:

© Financier Worldwide



Robert A. Bartell

Duff and Phelps


Gregory Lindae



Justin Abelow

Houlihan Lokey


Albert Alsina

Mediterrania Capital Partners


Christopher Elvin


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