[ U P D AT E ]
Takeaways from
the annual
Super Return
conference
FINANCING, RETURNS FOR
PRIVATE EQUITY, AND DIS-
RUPTIVE TECHNOLOGY WERE
AMONG THE KEY TRENDS
DISCUSSED AT SUPER RETURN
IN BERLIN.
F
or those who braved the sub-zero tem-
peratures courtesy of the “Beast from
the East”, Super Return continued to live up
to its name.
Arguably private equity is having a bumper
year, raising record-beating sums of money
from investors desperate to generate
above public market returns. So impatient
are institutions to access private equity
funds that some have reportedly taken
to begging managers to let them in, as is
what reportedly happened at CVC recently.
Parallels with the hedge fund industry in the
mid-noughties cannot be missed.
The decade-long inertia in hedge fund
performance was partly driven by the huge
inflows the asset class amassed post-crisis,
as investors shifted their cash out of con-
ventional stocks and bonds. As the industry
became institutional and larger by AuM size,
trades became crowded and returns fell.
A similar fate could befall private equity,
argued some of the more bearish panellists.
The proliferation of cheap financing and
dry powder, not to mention the growing
competition in the market, is testing private
equity’s nerves, mainly because firms are
struggling to find acquisition targets that
are not overvalued. That it is not uncommon
for managers to be paying 10 times plus
EBITDA for fairly generic companies is lead-
ing to predictable 2008 comparisons. Not
everyone, however, thinks the private equity
bubble is about to implode.
Some managers believe private equity
is looking in the wrong places for returns,
pointing out the industry has paid scant
attention to fast-growing emerging market
companies and disruptive technology start-
ups.
While private equity is unlikely to flop,
more investors are co-investing and going
direct in what could be a challenge to the
industry’s status. The logic goes that inves-
tors pay a lot of money to be in private eq-
uity funds and those fees eat into returns,
and some feel the cost economics would be
better if deals were internalised. In-sourc-
ing private equity has its pros and cons for
investors, but it is becoming more popular.
While managers are sympathetic to AI as
an interesting tool which they can use to
analyse big data trends, blockchain does not
seem to cut the mustard.
Blockchain – rightly or wrongly – is seen
by private equity as a technology which has
more applicability to mutual funds or trans-
action banking where trading volumes are
much higher. Private equity firms all have
their own nuances in terms of how they
apply their carry methodologies or calculate
management fees, while most firms will
execute no more than four transactions per
year. As such, private equity generally feels
blockchain is not suitable for their bespoke
needs.
Private equity had high hopes for the new
US administration given President Trump’s
background in real estate, and the involve-
ment of several industry titans including
Blackstone’s Stephen Schwarzman in a
number of his advisory groups. Those hopes
have since been dashed with the passing of
the Tax Cuts and Jobs Act (TCJA).
The TCJA will constrict the amount of in-
terest expenses on debt that managers can
offset against their tax liabilities. A likely
consequence will be a decline in LBO activity,
while private equity-owned companies with
large debts could be forced into liquidation
earlier than when they probably would have
been.
The other elephant in the room facing
private equity in the UK is Brexit, with man-
agers still sitting on the fence as to whether
they relocate staff into the EU to avoid
disruption to their EU sales and marketing
processes, or take a punt on negotiations
actually yielding something fruitful. Views
are mixed on Brexit but there is growing
disquiet about what AIFMD revisions will
look like absent the UK FCA’s participation
in the discussions, with some expecting a
tightening up of private placement, third
country equivalence and delegation.
Private Equity Issue 2018
globalcustodian.com
9