2019 was a record year for private equity inflows — here’s what 2020 may look like
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A key theme in the unlisted space in 2019 was the sheer scale of money moving into private equity funds.
By July, global PE firms were sitting on around $US2.5 trillion ($3.7 trillion) of capital to deploy — an all-time high and well clear of the $US1 trillion peak reached prior to the 2008 financial crisis.
And according to financial analytics firm PitchBook, funds raised by PE companies across Europe and North America had already reached an annual high of $US342.9 billion by mid-November this year.
But in a 2020 outlook report on the sector, a PitchBook research team led by analyst Dylan Cox said the rate of capital inflows is expected to cool off slightly.
The analysts based their view on the fact that having raised all that capital, the biggest funds will now be incentivised to deploy it.
At the same time, they’re not expecting it to be a sharp fall with the broader trend — an increasing prevalence of huge institutional capital flows moving towards private investment opportunities — expected to remain in place.
For those tracking the movement of money into PE, PitchBook said it might also be worth keeping an eye on public markets.
Stocks globally are tracking higher into the end of the year, led by US markets which continue to breach new record highs.
But if equities come off the boil that could filter through to PE via a “denominator effect”, PitchBook said, where investment funds are forced to slow the pace of private allocations if other aspects of their portfolio have lost value.
The analysts also discussed the increasing involvement of sovereign wealth funds and big pension funds in private markets — a trend which has also been evident in Australia and remains a subject of debate among investors and analysts.
While private investments provide the lure of higher returns in a low-interest rate environment, they also present an added degree of liquidity risk in a market downturn.
But on a global scale, PitchBook said it expected the big players to remain active, pursuing models such as direct deals and co-investment structures.
That trend has been driven by the big Canadian pension funds, but the analysts said a key trend to watch was whether it’s picked up by US funds — which so far have been more hesitant in the space.
If a large fund from California, Texas or New York “can bring in a team and complete more PE deals outside the fund structure, we believe other large pension funds would follow suit”, PitchBook said.
And in terms of investment focus, the analysts said they expected to see a continued pickup in activity in the tech space, as PE firms allocated their weight of capital to tech buyouts from the venture capital firms that made early stage investments.
“Tech companies continue to drive performance in both the public and private equity markets, pointing to heightened investment in the space,” PitchBook said.
But as a caveat to that forecast, the analysts highlighted the potential influence of some high-profile tech bust-ups (most notably WeWork), which could dissuade PE from making late stage investments — or at the very least put more of a premium on cash flow and profitability.
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