From turmoil come treasures: Mapping out PE's road ahead

Gregoire Gille: To what extend did dealflow and processes suffer from the Brexit vote and other external factors this year?

Simon Cope-Thompson (Livingstone Partners): Looking at the UK market, 2016 was actually in line with previous years that saw impactful events taking place around the half-year mark: the Scottish referendum, general elections, etc. There hasn't been a smooth approach to mandates coming in. Furthermore, there was definite hold in the immediate aftermath of 23 June. But it turned very quickly: as soon as the government was sorted, people that wanted to get sales underway came back to the table. They might have used it to renegotiate some of the terms, but all the deals we worked on at Livingstone eventually got done.

Ed Waldron (Taylor Wessing): I would echo that for Taylor Wessing. We had deals immediately going on hold, especially those that involved US buyers. But I have to say that, of all the transactions I am aware of, all of them eventually went through in the next couple of weeks. So while July was quiet we ended up having a very busy fourth quarter.

Wol Kolade (Livingbridge): Actually, we at Livingbridge did more deals this year than we've ever done before - and returned more capital than ever as well. And yet I don't feel great; I think we are still waiting for the other shoe to drop. For starters, we are certainly spinning many more plates to eventually get deals done. We did two deals in the last week, and I know there were at least five we took very close to completion. That's unheard of; previously, if you were down to doing the legals, you just got the deal done.

David Wardrop (Rutland Partners): For us at Rutland, we found uncertainty creates opportunity. The sheer level of introductions was higher than what it was in 2015. This has been a good year, both in terms of new investments and exits. But yes, processes are now more complicated, more elongated and more difficult to pull off throughout the year.

David Wardrop, Rutland Partners

Capital bubble

Gille: From an investor's perspective, is this adding to the ongoing concern that the vast amounts of capital available will increasingly struggle to find a home?

John Hess (Pavilion Alternatives Group): A trend that came to characterise 2016 for us at Pavilion was that the buyout market became very pricey. From an LP perspective, there's been a lot of money raised that has yet to be invested. There are not as many deals being done as we would like to see and we are not sure that 2016 will be a great vintage year. That said, our approach has always been to trust managers to do their jobs, and deploy capital sensibly. Yes, if we see a GP that has put only 20% to work over three to four years, we would raise the question - and usually there are underlying issues. But in general we are not that concerned for the time being.

Janet Brooks (Monument Group): The issue of deployment has always been a concern among investors. What might be magnifying the issue at the moment is that given the lack of visibility over the coming months, managers might be tempted to come back to the fundraising trail earlier than they naturally would have to take advantage of the record levels of capital available at the moment, which they fear might not be the case in a few months' time. Nobody wants to be the one that missed the opportunity.

X factor

Waldron: Do you not think that is also a factor of fundraises taking longer though? Perhaps GPs feel they have to come back to market now given the time it might take them to raise?

Brooks: Yes that certainly plays a role. Fundraising is still a very inefficient process so the science of figuring out when to launch in order to have money available when you need it is still inexact. But on the whole, groups are raising earlier at the moment as they see the possibility to raise capital in a more benign environment.

Hess: It is definitely a great time to raise money - demand is very high. If you can't raise money in the current environment, you should probably give up!

Gille: One of the obvious concerns this supply/demand imbalance is creating has to do with pricing for assets. This has been a key talking point of 2016 – is it still likely to impact processes in the coming months?

Kolade: Saying "pricing is an issue" in itself is odd - pricing is what the market makes of it. The issue is whether you can sell for that price later on: if you are paying 10x or 12x, you had better make sure you can get that on the way out, or accept it will go down and bet on growth. Another thing is that at the smaller end it is much harder to find accurate comparables like you can in the large-cap space so having a one-size-fits-all approach to pricing is tricky.

Wardrop: Price has been quite polarising this year. We have seen keen pricing for assets that have that certain quality: it is in a particular sector, the management team is highly regarded, etc. There has been a whole group of other things that haven't been flavour of the month and that is still sensibly priced.

Cope-Thompson: On that polarising theme, you can scare people off very easily in the current market, especially in the mid-market. Running a process that is going to be too brutal, has too many hurdles or is seen as too competitive may not yield the best result. It really is down to the adviser to pick the people that will be excited about the asset and will follow through. There is now more attrition than there was a few months ago.

Simon Cope-Thompson, Livingstone Partners

Overseas trade buyers influx

Gille: The question of pricing and competing for assets has been impacted this year by the influx of overseas trade buyers, especially when you take the currency effect into account in the UK. Do you expect this to remain a key feature?

Cope-Thompson: The listed groups that we sold to are aware of the fact that the currency devaluation might be good for the "in" price, but that they now have to convert sterling earnings to dollars and that doesn't help them. The US players we have sold to in recent weeks have all bought because they genuinely, strategically wanted that asset.

Kolade: Indeed, from our experience this year I am not sure the currency factor (and therefore the impact of the Brexit vote) is necessarily at play here. If anything, the closer we get to the actual Brexit deadline, the more the full ramifications are likely to dawn on these trade buyers. This is a question worth revisiting in 18 months' time.

Wardrop: If anything, we have seen more privately owned assets coming to market, as well as disposals by corporates – so there's a subtle change towards more primary opportunities. For the former, it seems the current uncertainty is pushing private vendors to de-risk to some extent. On the corporate side, again the uncertainty means that now might be a good time to rationalise and not get distracted by an aspect of the business that could become more exposed in the future.

Cope-Thompson: There is also the fact that a lot of PE assets have been moved earlier than expected in the past two years. In terms of supply of assets ready for exit, a number of PE houses have sold more than anticipated against the annual average, so the mix is changing anyway. Alongside that a number of entrepreneurs know that the market is strong at the moment - many held off post-Lehman and now, eight years on, there is only so much time they want to wait.

Strategy for LPs

Gille: Beyond sourcing, what elements of strategy are LPs particularly attentive to in the current, volatile environment?

Hess: We are seeing an environment where it increasingly looks like the way to grow a company is through some sort of a buy-and-build type strategy. From our investors' standpoint, looking at a fund or GP means asking to what extent they really do bring operating expertise to their investment companies.

John Hess, Pavilion Alternatives Group

Brooks: LPs want to really understand how returns are produced and how GPs are potentially going to produce those going forward in a lower-growth, more difficult trading environment. A lot of firms have added to their team considerably in those areas. Generally everybody is going to have a value-adding partner or a special operating partner. Everyone is moving forward with that strategy, so it's a matter of what's next and what's more concrete.

Kolade: There are some really skilful people who have a nose for doing deals, but it's just not very scalable. They have a small fund and they are able to time and time again bang them out. Then you have this vast middle ground of people who are not like that but are not process-driven like the big guys. We're trying to find our way through this and it's not simple. If you look at us now and look at us again in five years' time, I can guarantee we'll be different.

Check back tomorrow for part two of our Q&A session with leading private equity practitioners on the year that was and what lies ahead in 2017

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