2017 has been a record-breaking year for the private equity world, and valuations have risen ever higher, despite geopolitical instability.
PE Firms break new records
Preqin and Barr data reveals 2017 was a record-breaking year for private equity fundraising. As of November, private equity vehicles closed in 2017 to date have raised $406bn, already more than the $403bn raised in 2016. The $100 billion Softbank Vision Fund became the largest private equity fund ever raised and the $24.6 billion Apollo Fund IX became the largest ever buyout fund.
It was also a record year for secondaries fundraising, which reached $29bn in the first three quarters of 2017, already matching the current record for 2014 as a whole.
Figures like these explain the sense of optimism from investors in 2017, with recent survey results showing 95% of respondents are either satisfied or highly satisfied with the performance of their investments. Private equity’s popularity looks set to continue into 2018.
Valuations remain high
However, the private equity market is far from invincible. There has been some concern this year over increasingly high valuations. Latest figures from Pitchbook show PE firms are paying more for mid-sized companies (less than $1billion) than they have done since 2006, and Preqin figures show that 49% of investors believe prices were higher in 2017 than last year. These high valuations are driven by hot competition and large amounts of ‘dry powder’ in the market.
Ever-increasing valuations are currently one of the top concerns in the private equity world, with investors unable to buy assets at competitive prices, and therefore concerned about diminishing returns.
This could explain 2017’s trend of investors opting for longer-term funds. Several firms this year raised funds that can invest in assets for as long as 20 years – significantly more than the typical holding period of 7-15 years.
Similarly, lower-risk, sustainable markets such as infrastructure have grown in popularity in the last 12 months, as we highlighted in a recent blog. This year, our digital analysis has focused on these longer-term trends, which is valuable for those making a wide range of investment decisions.
With high prices and stiff competition looking set to continue into 2018, we recommend investors focus more than ever on markets with long-term growth potential, and start the diligence process as early as possible to rule out potential risks and ensure assets have robust growth strategies.
Geopolitics – a lot of hot air?
2017 saw a shock election outcome in the UK, ongoing Brexit negotiations, Donald Trump flex his political muscles against North Korea, and Catalonia’s heated independence referendum (which we analysed here) to name just a few events. At onefourzero we have seen our work focus ever more on the effects of geopolitics.
Record-breaking activity indicates that private equity markets so far have responded well to the challenges of geopolitical instability.
As Kerim Derhalli, CEO of FinTech app Investr, said earlier this year in response to the UK’s snap General Election: “In this strange dystopian present, the one constant has been inconsistency, and many firms, big and small, in the finance world have learned to expect the unexpected.”
Among investors in more politically sensitive areas of the market such as education, health, and social care, we’ve seen Brexit surface frequently as a consideration in 2017, but it hasn’t yet limited activity. Continued demand for these essential services has meant investment remained steady.
Indeed, within our digital analysis of international markets, we have found that consumer trends relating to education and health services provision seem to be relatively unaffected by political events.
For example, in the US, the volume of interest from overseas students increased by 3% in 2017 overall. While Donald Trump’s vocal anti-immigration sentiment and new measures deterred students from some Middle-Eastern and Latin American countries, geopolitical developments have, so far, had little effect on demand as a whole.
How this will manifest over time can be tracked almost instantaneously through digital monitoring, which produces qualitative data on consumer sentiment and habits, and provides the most up to date insights on how demand interacts with geopolitical developments.
The year ahead
2018 should see the UK finally reach a deal and actually exit the EU, meaning we may be yet to see the effects of Brexit.
Our sister agency GK’s MD Louise Allen predicts: “2018 will be the year firms start thinking practically about Brexit. As the initial uncertainty fades and the UK finalises a deal, businesses will have to adapt to navigate a host of new regulations and a new political landscape.”
So, how best to expect the unexpected in 2018? We recommend using evidence-based approaches relying on big data and consumer insights to inform growth strategies and help plan for unexpected outcomes.
Firms who successfully do this are best placed to succeed in what looks likely to be another busy year.
To find out how onefourzero’s insights and analysis through digital due diligence can support your business in 2018, get in touch with firstname.lastname@example.org