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While in recent years, private equity has experienced a real boom and succeeded in attracting institutional and professional investors alike, the marked slowdown in growth since the beginning of 2020 is likely to continue and will probably be exacerbated by the global health crisis. Parallel to this trend, retail investors are increasingly turning to this asset class in a bid to diversify their investment portfolios.
Is private equity losing its appeal?
Investments in private equity (both direct and via investment funds) have proven popular with both institutional and professional investors for several years now. This very ‘private’ asset class has got people talking, despite being rather inaccessible to the general public. Established companies have been acquired by major private equity firms mainly with a view to being restructured, reoriented and made more profitable, only to be sold afterwards, generating significant capital gains in the process. Other funds have focused on start-ups, primarily tech firms, some of which have proven to be veritable unicorns.
However, this trend seemed to slow significantly, at least in 2020. According to the Centre for Management Buy-Out Research (CMBOR), H1 2020 recorded a 39% drop in private equity transactions in Europe compared with the same period in 2019. The decline in the value of these transactions is less marked, at around EUR 41 billion (-7%).
Has this been the case for all sectors?
Nearly one third of all transactions involved tech, telecoms and media companies. This finding is hardly surprising insofar as the health crisis has had a positive impact on these sectors. The same is true for the healthcare, logistics and consumer goods sectors. On the other hand, the aviation, tourism, hospitality and leisure sectors have been severely affected overall by this crisis, and the final impact is still hard to judge.
The medium-term effect on the real estate sector is also proving difficult to gauge. The almost immediate and large-scale switchover to working from home demonstrated not only a swift response to a new environment, but also the technological and human capacity to adapt to this new situation. Many companies in the services sector were therefore able to keep their business running, in the realisation that it’s not always necessary for all their staff to be on site at all times. As a result, office space will naturally free up as leases expire. With more people working from home in the coming years, there will be other consequences, especially for local businesses and mobility.
What does the future hold for this asset class in general?
On a positive note, companies in sectors currently experiencing the highest demand are of course benefitting greatly. Some private equity companies are reporting exceptional earnings, and valuations are skyrocketing. However, it is still extremely difficult to assess a company’s real medium and long-term value based solely on the fact it has been able to respond very quickly to immediate demand and needs. One such example can be found in industry, where businesses have diversified use of their core production facilities in record time. While such a swift reaction is proof of great agility, showing their ability to make and implement decisions quickly, this response alone is not sufficient evidence of a sustainable medium or long-term vision.
As regards sectors most affected by the crisis, a major investment would currently be of greater support for this sector than a calculated bet on the recovery and return to a similar (or even greater) level of activity at the end of the crisis.
Will Private Equity soon be available to all?
Access to this sector is principally reserved for major institutional investors and generally calls for a sizeable medium, and indeed long-term financial commitment.
However, initial steps have been taken to open access to this asset class up to a wider public. Feeder funds have thus been created, which in turn invest in major private equity funds for which the minimum subscription often runs into tens of millions of euros. The purpose of these feeder funds is to garner investment from private investors, often with minimum amounts of tens of thousands of euros and depending, of course, on the limitations imposed by the regulations in force in the fund’s country of domicile.
European Long-Term Investment Funds (ELTIF), which have for a long time been ignored by investment fund initiators, could finally have their day in the sun. This type of fund could democratise access to this ‘private’ asset class, while offering entry and exit mechanisms akin to those of traditional funds.
In conclusion, private equity is seemingly experiencing a hiatus, although this has not dampened the sector’s entrepreneurial spirit in the least. It is undoubtedly better to be in a cash-rich position when looking out for good investments than the other way around. And private equity funds could well prove to be valuable financial partners in the implementation of major government stimulus initiatives, many of which have made sustainable green transition a central theme.
Would you like to know more about the services Banque de Luxembourg offers institutional clients? Contact our specialists.
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