Conference Presentation, Fireside Chat, Panel
Private Equity: Rotation and Valuation
- New regulations and banking sector shifts are expected to redirect capital flows to private equity, creating global opportunities to extend credit to diverse borrowers as regulatory reform extends beyond the United States.
- The industry is projected to transition from a pure private equity focus to a broader alternative asset business model, with a market bifurcation where passive investing grows in public securities while active managers seek alpha in alternatives.
- Limited Partner relationships are anticipated to deepen with increased transparency, a balanced split between U.S. and international investors including sovereign wealth funds, and a significant expansion in special managed accounts.
- Fee compression is expected to continue as a result of changing LP demands, while the broader market remains in early stages of evolution with the top five firms holding less than 10% market share.
- Technology is predicted to be a disruptive force across all sectors, including the creation of 3 billion new online users, the rise of 3D printing, and the necessity for investment committees to assess digital threats to business models.
- Strategic partnerships, such as those in cybersecurity and media consolidation, are expected to create dominant market entities, with live events viewed as immune to digital piracy due to their community nature.
- Consumer trends indicate a definitive shift from bundled media to skinny bundles and over-the-top services, driven by mobile consumption where 88% of U.S. youth stream content, and sports are expected to define industry winners.
- Market multiples are expected to contract as interest rates rise, creating a high-priced environment that demands high selectivity, making mid-20% returns difficult to achieve when paying ten times EBITA.
- Credit markets are forecast to offer significant opportunities through a "Chinese menu" of products ranging from 5% to mid-teens returns, serving as a replacement for bank proprietary desks and filling the gap left by shrinking financial institution balance sheets in Europe.
- Distressed opportunities are identified in specific sectors such as the oil patch following price halving, alongside a need for $2.5 trillion in U.S. shale development and $115 billion in energy credit.
- Healthcare is highlighted as a top opportunity due to disruptive innovations unrelated to broader economic cycles, including predictive health technologies that can alert users to heart attacks weeks in advance.
- Sovereign wealth funds are expected to establish direct investment teams, moving from traditional private equity into infrastructure and credit assets, while shadow banking is predicted to expand until interest rate changes potentially retract it.
- Capital deployment strategies will vary by firm size, with large entities expected to operate on a low-deal cadence (approximately 10 deals annually) while selling assets at a ratio of four to one relative to new investments over recent years.
- Specific asset acquisitions, such as Cirque du Soleil and European real estate, are viewed as opportunities for optimization and value creation, while the sale of GE Capital assets is described as a permanent shift driven by regulatory changes affecting a $200 billion portfolio.
- Pension funds facing 8% liability bogeys with low-grade yields around 3% are forced to reallocate capital into alternative investments, supporting the shift toward higher-yielding credit and private equity strategies.