Private equity is at a crossroads. A once carefree industry, it is increasingly assailed by regulators and investors demanding lower fees, higher returns and greater financial transparency. Valuations, having risen sharply, may have peaked; the average price paid for assets by US buyout firms in 2015 was 22.4 times earnings, according to data from Bloomberg. The buyout industry had a mixed year globally. In Asia and Europe, private-equity-based firms raised $21.5 billion and $29.6 billion1 respectively via initial public offerings (IPOs), comprising year-on-year increases of 78 per cent and 14.8 per cent. In North America by contrast, just $20.1 billion was raised on the public markets via IPO exits, a fall of 16 per cent on 2014 figures.
Many experts pick out Europe as being a market likely to continue growing into 2016. Innocenzo Cipolletta, chairman of the Italian Private Equity and Venture Capital Association (AIFI), said the region, for all its macro-economic woes, remained “an interesting target, with interesting opportunities”. He added that North America may have another tough year, noting that a “volatile” junk bond market was having “a negative effect on US private-equity-backed IPOs”. Britain and Germany soaked up the majority of big-ticket European deals. These included the April 2015 sale of Virgin Active to South African investment firm Brait, valuing the UK health club chain at £1.3 billion ($1.86 billion). Terra Firma sold its German motorway service station operator Autobahn Tank & Rast to a consortium including Allianz and Borealis Infrastructure Management for $4.4 billion. In October, Bain Capital and Advent International finalized the initial stock sale of Worldpay, which went public in London, valuing the British payments processor at £4.8 billion.
Growth sectors
The bulk of deals globally emanated from the consumer goods and financial services spaces. Buyout experts tip the two sectors to remain dominant in 2016, along with pharmaceuticals and healthcare, but with energy, utilities and technology likely to struggle for traction. AIFI’s Cipolletta reckons the industry will see “greater investment in the banking sector” this year, with distressed assets set to be a major target for buyout groups. Charlie Johnstone, an origination partner at ECI in London, which owns brands such as UK-based Evans Cycles, sees deal flow remaining strong in sectors including fintech, business services, legal services and insurance. Restaurants would remain a hot-ticket industry, but investors will need to be “exceptionally selective given how much money has piled in recently”. Another fund executive warned there was “a bubble building” with technology “unicorns”: young firms valued at more than $1 billion. “I would be wary of that end of the market,” he said. “There will be a correction this year.”
Other sectors likely to see greater activity in 2016, experts say, include pharma and healthcare, as wealth is further concentrated in the hands of baby boomers. In January, Varsity Healthcare Partners agreed to sell Forefront Management, one of the largest providers of dermatology services in the US, to Canadian pension fund Ontario Municipal Employees Retirement System for more than $450 million. The same week, New York-based mid-market private equity investor Riverside Company bought New Jersey-based Dermatology Group for an undisclosed total. Another notable recent transaction involved the sale by Bain Capital of medical technology firm Physio- Control International, to Michigan based Stryker for $1.28 billion.
1. Source: Bloomberg for Private Equity
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Notes:
- This article was written by Bloomberg Professional. It appeared first on the Bloomberg Terminal blog, and is based on Bloomberg’s “Private Equity Outlook” report.
- The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Roxaninem, Public Domain
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