Private equity predictions for 2020 — from KKR, BC Partners, PAI and more

Private equity executives predict what the biggest trends will be in the new year

From a jump in deal flow to why some firms will disappear, private equity executives share their expectations for the next year.

Mattia Caprioli and Philipp Freise
Co-heads of Emea private equity, KKR
We invest in an increasingly volatile and challenging public context. Geopolitical, macroeconomic, sustainability and reputation considerations have become more important in assessing and implementing an investment thesis. We only see this becoming more so in the next decade.

Simona Maellare
Emea head of financial sponsors and global co-head of the alternative capital group, UBS

In recent quarters of 2019 we have seen a number of industry shifts that we expect to continue into 2020. These include the falling rate of fundraising following a number of record setting years as LPs feel sufficient exposure to PE allocations; and falling PE exit volumes given volatility in public markets, geopolitical uncertainties and top of the cycle worries.

On the positive side, equity market volatility and record private market valuations are presenting an arbitrage opportunity and we have seen an increased number of public to private transactions, a trend we expect to continue into 2020. Additionally, on the investing side, rise of activist investors and their increased focus on Europe is expected to trigger corporate disposals providing a much needed flow of new investment opportunities for PE. This is further supported by the high corporate debt level amidst record low interest rate environment with management teams looking to de-lever and dispose of non-core divisions ahead of the change in the cycle.

The diversification of the private equity investment mandate into various asset classes beyond traditional buyouts is perfectly embodied by the creation of the Alternative Capital Group at UBS looking to align our services with the increasingly complex needs of our clients.

Sunaina Sinha
Managing partner, Cebile Capital
Next year will continue to see a focus on the private equity mid-market and thematic funds. The mid-market in both the US and Europe is where you can still buy at sensible acquisition multiples, add real value to the company, and deliver a stronger and healthier asset back to market. The same goes for sector focused funds which will be able to originate such deals better, differentiate themselves on value add and strategic exits.

Alan Jones
Senior managing director, private equity, ICG North America
At the beginning of the last decade, the handful of firms who had dedicated operating partners possessed a distinct competitive advantage over firms who struggled to generate alpha primarily through financial engineering and through the increasingly difficult task of searching for value in a world characterised by eye-popping valuations for all financial assets, engendered in large part by the post-crisis policy response of waves of central bank liquidity.

Today, with most PE firms now bristling with battalions of operating partners, the arms race in 2020 will shift to information technology, where the weapons of choice will include big data, artificial intelligence, and machine learning. Private equity firms will deploy these weapons across all the theatres of operations but will focus heavily on using them in sourcing of investment opportunities and on operational improvements.

A side note: a somewhat contrarian – and quite effective – investing strategy will continue to be focusing on what I have called “barbers and plumbers”, i.e., those businesses that are well insulated from automation risk or from outsourcing risk. It is difficult to outsource haircuts and plumbing to distant shores where labour may be cheaper and difficult to automate those functions technologically.

Philippe Poletti
CEO, Ardian France
Technological disruption has been a great driver of change in our industry and we expect this trend to continue in 2020. There will be opportunities for companies from all sectors as business models face transformational change and evolution against a backdrop of technological innovation, digitalisation, market disruption and competition from new entrants in a volatile macro-economic climate.

The challenge for us and our portfolio companies will be how quickly we can react to the changing technological environment and leverage these changes to capture market share and become even more competitive in the current market environment. At Ardian, digitalisation is becoming a major focus across all our portfolio companies and forms a key element of the investment case for all our teams. We ourselves are also affected by the process of digital transformation and we are exploring its huge potential across deal origination and due diligence, investor relations and reporting.

Frédéric Stevenin
Partner and CIO, PAI Partners
The importance of and the ability to demonstrate specialisation has been a rising trend and one we expect to gather pace in 2020. Being industry experts allows GPs to consolidate sectors in markets where growth can be sustained not just through economic and financial cycles, but also in a politically fluctuating environment. With competition in the industry only increasing, it is crucial that investment firms clearly demonstrate that they are able to provide management teams with access to specialist market expertise and deep industry knowledge and connections. This is key to building international sector leaders.

We also expect the secondaries market to continue to develop and flourish. GP-led processes are becoming more popular as firms look to hold investments with continued growth potential for a longer period. We have every reason to believe that an increasing number of firms will be pursuing this option for the right assets.

Marc Frappier
Managing partner, Eurazeo Capital
Private equity practitioners have not always been fully cognisant of their impact on the companies they invest in or the communities in which they operate. Rightfully so, national authorities, investees, investors, and employees are no longer tolerating this, and I expect this discourse to continue and positively develop.

While ESG standards continue to develop, as well as our ability to monitor and implement them in investee companies, I anticipate a conversation of a more fundamental nature will occur as to private equity’s purpose and function in society. Amid political backlash in Europe and the USA to untenable investment practices, we believe that it is crucial that those operating in our sphere seek, with greater vigour, opportunities for long-term and sustainable growth. I do not think it will be long before firms that cannot confidently articulate their position and contribution to society will begin to struggle and even disappear.

Raymond Svider
Chairman, BC Partners
LPs are streamlining their GP portfolios and considering more concentrated strategic relationships across asset classes. As such, GPs with high calibre teams across more than one asset class will benefit from this trend.

Per Franzén
Partner and co-head of private equity advisory team, EQT
Top quality companies will continue to be in demand in 2020, so one key trend will be increasing LP scrutiny regarding how GPs can deliver long-term sustainable value and attractive risk-adjusted returns in an environment where entry multiples remain high.

The reality is that good companies understandably command higher multiples, so our focus is on what EQT can do to improve the businesses invested in and take them to the next level of growth. In this way, EQT’s thematic investment approach, ability to future proof companies, and approach to creating real, sustainable value all have far more impact on the outcome at exit than the price paid at entry.

Lewis Bantin
Partner, ECI Partners
Without a doubt a jump in deal flow. Over the past 12 months Brexit has had a compression effect on overall deal volumes in the UK mid-market, bringing forward sales into 2018 ahead of the original Brexit deadline, and creating a deal vacuum in 2019 with deal volumes down almost 45% in our target market. As asset owners, we have used this time to make investments in our companies to flex their business model to a post-Brexit world, for example by de-risking their supply chains. Once those investments have been made we have had to wait and demonstrate the impact on their cost base and margin profile. In 2020 we expect a marked increase in deal flow as this pent-up demand is released and these investments come to fruition.

Dylan Cox
Lead private equity analyst, PitchBook
Despite its rapid expansion over the last decade, 2020 global PE fundraising could fall behind 2019’s totals. Many large firms—including Blackstone, Vista, and Thoma Bravo—raised record-setting sums in 2019 and will be in the capital deployment phase next year. Commitments are sure to be strong when compared to almost any other year, but there is currently no fund in the broader market targeting more than $10bn. The exception could be Europe, where fundraising still has some legs. In fact, three firms are set to raise flagship mega-funds (above €5bn) in 2020. Despite middling economic growth in the region, European buyouts still trade at a discount to public markets, which is likely to continue attracting prospective investors.

Source: Financial News

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