Through the end of 2014, the ratio of private equity exits (for example, IPO or sale) to private equity investments reached a 10-year high. We've clearly been in what we'd consider to be a seller's market. While this seems to be a positive dynamic, how we got there makes all the difference.
On the exit side, private equity investors have benefitted from: 1) strong public markets, 2) strategic buyers seeking growth through acquisition as organic growth becomes more difficult to achieve and 3) aging private equity portfolios in need of realizations. On the investment side, however, given the froth in the market and the resulting elevated asset prices, investment activity has fallen nearly 8% since 2012.
Key Takeaway: While the growth of the exits-to-investments ratio may seem positive, the way it has grown (a steeper decrease in the number of investments versus the corresponding increase in the number of exits) is actually detrimental to long-term private equity investors, who need to put money to work consistently in order to better position their portfolios to meet their return expectations. We believe that investment activity is likely to pick up in 2015, particularly in middle market transactions (between $25 million and $1 billion deal value), given the: 1) continued availability of low-cost debt, 2) considerable amount of undeployed capital from 2012 and 2013 vintage year funds, 3), capital available from strong fundraising in 2014, and 4) participation in middle market transactions by firms that have historically focused their efforts on larger transactions. These factors, as well as continued favorable exit fundamentals, lead us to believe that 2015 will continue to be a seller's market -- with an improving relationship between investment and exit activity.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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