Taal selectie

Private Equity

Manager selection is key

The private equity sector is booming. Ultra-low interest rates and high listed equity valuations are pushing investors to look for other ways of investing their capital.

USA - Number of Listed Companies

liestedCieSource : TheGlobalEconomy.com, The World Bank

 

 

A Bain & Company report suggests that the volatility of public stock markets, where shares normally trade at a premium to private equity investments, is starting to offset their liquidity and transparency advantages.

Moreover, easy access to capital has enabled many private equity firms to make deals not only in small companies but also with larger firms, meaning that they can now cover all industries and sizes. This comes alongside a clear tendency towards fewer companies being listed on stock markets, as a result of a more tepid investor appetite for IPOs, corporate failures, mergers, and private buy-outs.

What exactly is private equity?

Private equity is part of the alternative investment asset class and consists of equity instruments (shares, warrants or convertible bonds) that are not listed on a public exchange. The private equity space encompasses several types of funds that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of such entities.

Private equity funds can be found in all sectors and also with all types of strategies: rescuing distressed companies, providing seed capital to very early stage companies, or buying out large publicly listed companies. In other words, the capital provided can be utilised to fund new technologies, to make acquisitions, to expand working capital, or to bolster and solidify a company’s balance sheet.

Private equity investments can be executed by taking minority stakes or by gaining full ownership, with or without the use of leverage. Initially, this constituted mainly institutional investor territory, but private investors are now increasingly attracted to the asset class.

A caveat

Median EBITDA purchase price multiple for global buyout transactions, by deal size

bains and coSource : Bain & Company, PitchBook Data, Inc.

The past few years have seen an unprecedented amount of capital flow into private equity. Beyond the above-mentioned reasons for such a trend, private equity funds also boast the strongest 5-year stretch of value creation for their investors in the industry’s 40-year history1. With this, however, comes another record: the amount of dry powder in the private equity funds’ war chests. This begs for caution in the selection of private equity teams and sectors. For instance, due to enormous inflows into large private equity firms, big ticket deals are currently very sought after. The smaller company space thus seems more attractive, even if it implies greater risk taking.

Banque Thaler has been successfully investing in private equity on behalf of its clients, at their request, for over 10 years – in a number of sub-sectors:

  • UK Small Cap
  • European SMEs
  • German Real Estate
  • European Technology
  • Gold Mines

Disclaimer: this article is purely informative and does not constitute an offer to invest in any particular fund. Readers should not rely on past performance in order to form their investment decision as it is by no an assurance of future performance.

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